Is Thrift Savings Plan Analogy Bogus?
Josh Marshall contends that, “One of the most misleading comparisons President Bush made in his State of the Union address came when he compared private accounts carved out of Social Security to the Thrift Savings Plan available to employees of the federal government.”
No federal employees put their Social Security funds into the TSP. The TSP is in addition to Social Security. To the extent that there is an analogy to anything it is to an add-on account — the kind Democrats support and Republicans oppose. . . . The question isn’t why everyone shouldn’t have the chance to get in on the Thrift Savings Plan. The question is why everyday Americans should have to choose between Social Security and the TSP when federal employees now get to have both.
Neither the president nor others using the analogy, such as columnist George Will, are using it to mislead. Rather, they use it to show that there are ways to combine investment in personal accounts with some reasonable level of security. This is in response to misleading claims by Democrats like Sen. Harry Reid. As Will notes,
In Reid’s televised “response” to the president’s State of the Union addressÃ¢€”written before the addressÃ¢€”he disparaged the idea of voluntary personal retirement accounts funded by portions of individuals’ Social Security taxes as “Social Security roulette.”
Why is this misleading?
Roulette is a game without any element of skill. By comparing the investment of some Social Security funds in stocks and bonds to gambling on roulette, Reid is saying that the risks and rewards of America’s capital markets, which are the foundation of the nation’s economic rationality and prosperity, are as random as the caroms of the ball in a roulette wheel.
After saying that the 4 percentage points of Social Security taxes could be invested only in a few broadly diversified stock and bond funds, Bush pointedly said to the assembled representatives and senators: “Personal retirement accounts should be familiar to federal employees, because you already have something similar, called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds.”
Thus, Bush proposes private investment with some government oversight. While not ideal from a libertarian perspective, it nicely rebuts the Democratic, “Yeah, but what about morons who invest all their money at the racetrack?” argument.
Update: As to Marshall’s “why not both” question, the answer is really simple. First, the president essentially is saying both, just giving people the option of going with anything from 96-100% of their current Social Security taxes and 0-4% into their personal accounts. Second, a lot of people simply can’t afford to put everything they’re currently required to put into SS plus more money into a 401K-type plan. Finally, the plan is supposed to help alleviate the impending strain on SS that comes from the fact that it really isn’t an investment plan at all but rather an inter-generational wealth transfer. To the extent that we remove younger workers even partially from SS, we decrease the amount their children and grandchildren will have to fork over to subsidize their retirement.