Retirement Risk

James D. Miller (“Risk-takers often get big payoff in the end,” March 25) unfortunately exhibits one of the principal misunderstandings regarding Social Security privatization: that it can offer higher returns only by saddling individuals with higher risk. This premise is false.

Miller asks the reader to imagine he has received one of two lottery tickets. Ticket 1 is guaranteed to pay the holder $100, while Ticket 2 pays most holders $120 but occasionally pays just $80. Ticket 2, Miller says, is like privatized Social Security: it would pay most retirees higher benefits, but some would be worse off. “If the stock market has a prolonged period of decline,” Miller says, “privatizing Social Security could some day be seen as the greatest mistake of George W. Bush’s presidency.”

Because Social Security pays each year’s benefits out of that year’s taxes, it’s annual “return” is the rate of growth of the tax base, projected by the program’s trustees at just 1.34 percent after inflation over the next 75 years. By contrast, a Series I inflation-indexed government bond is guaranteed to pay 3.4 percent after inflation. A worker investing at this rate would retire with a 70 percent larger nest egg, yet these Series I bonds are actually lower risk than Social Security, because the worker owns them and because the government cannot default on them without simultaneously defaulting to billion-dollar bonds funds on Wall Street.

True, a worker wanting higher returns than government bonds must take on greater risk. But he can receive higher returns than Social Security without any risk whatsoever.

Recent stock-market drops highlight the role of risk in retirement planning. But those considering support for Social Security privatization should not think that private investment’s higher returns derive only from higher risk. They do not.

Andrew G. Biggs is a Social Security analyst and assistant director of the Cato Institute’s Project on Social Security Choice.