The Left’s favorite economist of the moment, Thomas Piketty, organizes his argument in Capital in the Twenty-First Century around the statement r > g, where r is the rate of return on capital and g is the rate of economic growth ... r > g is a stronger argument for privatizing Social Security than it is for a global capital tax.After telling workers what they put into the Social Security Fund, he jots off this lie:
That money is not invested, so there is no return on it.The Trust Fund does put these funds into government bonds which earn the real return to government bonds but I interrupted Williamson’s parade of lies:
Professor Piketty estimates that the return on capital over the coming decades will be between 4 percent and 5 percent; historical returns to equity investments run about 7 percent, but let’s be conservative and split Professor Piketty’s estimate, assuming a 4.5 percent return.So many rates of return, so little insight. What is at stake here? Let’s assume the risk-free real return is 3 percent and add a 4 percent premium if someone chooses to hold risky stocks instead of government bonds. And let’s also assume some worker was able to accumulate $1 million under Williamson’s preferred world of privatization. Even if this worker was able to avoid the bad advice and huge fees from the financial advisors that Williamson is lobbying for, he is likely to get a 5 percent return if he chooses to put half of his portfolio into stocks and the other half into bonds. After all, this worker knows stocks are risky. I sometimes wonder if the champions of privatization do as their writings seem to suggest they don’t get Finance 101. So back to Williamson’s complaint about our current system:
You pay, officially, 6.2 percent of income up to $117,000 a year for Social Security. Your employer pays another 6.2 percent, and many economists and nine out of ten people who were born at night but not last night assume that you really pay that part, too, in the form of lower wages.In our example suppose that this has taken $400,000 of our worker’s portfolio and put that into government bonds earning 3 percent. Our worker – who we are assuming knows more finance that apparently Williamson does – redoes his portfolio optimization putting $100,000 of his $600,000 into bonds and the rest into stocks. The basic message is that his retirement income is exactly the same. This is basic finance and maybe I’m being unfair. Maybe Williamson knows all of this. If so, then he has chosen to lie to his National Review readers hoping they are this stupid.