As Brad DeLong hinted last night, today’s Washington Post article about Social Security privatization glosses over a serious issue at stake in the debate — that the potential benefits of private accounts are tied to potential risks, whereas the benefits of the current system are guaranteed regardless of the stock market’s performance.

As the New York Times reported on December 12, there is no such thing as a guaranteed return from private accounts invested in stocks and bonds:

To be sure, one of the biggest ways to reduce risk is to have a long time frame. People who invest at age 30 or even 50 have the time to ride out most of the ups and downs of the stock market.

But there are no guarantees. According to Ibbotson Associates, which publishes data showing average returns over different periods, large-cap stocks actually suffered a loss of 1 percent, annualized, from early 1929 to the end of 1942.

Granted, it is somewhat unfair to pick a time period that begins just before the great stock crash of 1929 and continues through the Depression. But many analysts contend that it is even more misleading to suggest that people should have complete confidence in their ability to earn above-average returns with no risk whatsoever.

Today the Post ignores the risks of the private accounts by failing to challenge claims about their benefits touted by its supporters.

The Post story concentrates on the Bush administration’s intention to change the formula used to calculate Social Security payouts:

Under the proposal [to change the formula], the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker’s lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century. The White House hopes that some, if not all, of those benefit cuts would be made up by gains in newly created personal investment accounts that would harness returns on stocks and bonds.

The Post goes on to detail the intricacies of the plan and lay out the arguments of its supporters and its detractors. The administration’s supporters argue that these changes will solve the Social Security shortfall calculated to begin near the middle of this century when the Social Security trust fund runs out of money. The detractors say that, “Future retirees would, in effect, be consigned to today’s standard of living.”

As a rebuttal, the Post turns the voices of David C. John, a Social Security analyst at the conservative Heritage Foundation and an ally of the president, and White House spokesman Trent Duffy. Their argument: those personal accounts would provide people another source of income to make up for the reduction in guaranteed benefits.

Finally, with the Post’s help, we learn that according to the chief actuary of the Social Security program, at first (say in 2032) the benefits from personal accounts combined with guaranteed benefits would be below what is promised by current law. But then, some time later (say in 2052), “returns on personal accounts would push total benefits for a middle-income worker to 129.4 percent of the payable benefit, even though the total benefit would still be about 6 percent less than promised because of the rising number of retirees.”

And, mysteriously, that’s how the story ends. Private investment accounts — the crown jewel of the Bush plan — receive frighteningly little scrutiny. The 129.4 percent figure is accepted at face value, without noting that it is based on a 50-year projection of stock market performance.

Never mentioned is the stark fact that while private investment accounts can produce rewards, there is a very real risk that they can produce net losses. That is, and will remain, the elephant in the room as this debate heats up. But you wouldn’t know it from reading this morning’s Post.

Thomas Lang

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Thomas Lang was a writer at CJR Daily.