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Gifts for all occasions in the Galleria! The "What is the Deal?" Deal-of-the-Week: Snow and Ski Getaways January 9, 2005 What is the Deal with the AARP? By Jan A. Larson  The American
Association of Retired Persons (AARP) has taken a position against the
President's proposal to privatize a portion of the Social Security
system. Why? According to information on the AARP website, because it is
too risky. The AARP believes that a government-funded (meaning
taxpayer funded), guaranteed (meaning more taxes can always be
extracted from the taxpayers) system is preferable to letting Americans
choose to invest their hard-earned money and control their own destiny.The logic behind the AARP position is flawed on so many fronts, I hardly know where to start. The AARP claims that there really are "trust funds" that are "invested" and "growing." However, they also admit, "current payroll taxes are used to pay benefits to beneficiaries." With doubletalk like that, maybe we should put the AARP in charge of the Social Security system and they could simply talk our way out of the problem. The simplest analogy for the way Social Security "investment" works is to use the example of a man, let's call him Uncle Sam, who saves for his retirement by putting $100 under his pillow. The area under the pillow is called a "trust fund." Now let's say that another man, let's also call him Uncle Sam, needs some money for some pork barrel spending. This Uncle Sam offers to borrow $100 from anyone willing and will pay a guaranteed rate of return. The first Uncle Sam decides that the second Uncle Sam's offer is too good to pass up so he "invests" his $100. The second Uncle Sam takes the $100 from the "trust fund" and replaces it with an IOU, otherwise known as a treasury bond. At the end of a year, the first Uncle Sam wants to collect on his investment and cashes in the IOU. The second Uncle Sam, having spent the $100, reaches into his left pocket and pulls out another $100 plus $5 for interest and gives it to the first Uncle Sam. Of course, the Uncle Sams are one and the same. What does Uncle Sam have to show for his "investment?" He has $105 in his right pocket that used to be in his left pocket. This is what the AARP terms "investing." The AARP admits that Social Security funding will become problematic in 2042, but that there is "no immediate danger" because the "trust funds" contain $1.5 trillion and are earning interest every year. Refer to the Uncle Sam example above. The AARP conveys the notion that the interest earned on the trust fund somehow magically appears out of thin air, not that it is all paid by taxpayers and that since 2042 is so far in the future, there is no need to get whipped into a lather today. An undeniable fact about money and investing is that time is your friend. Already nearly 20 years has been wasted in seriously addressing the looming Social Security funding crisis but yet the AARP doesn't see an immediate danger. The AARP emphasizes that Social Security is guaranteed and you can't outlive your benefits whether you live to be "70 or 107." What they don't address is that while a person may spend 40 or more years working and paying payroll taxes and, if he or she should die before collecting Social Security, their families don't see a dime of that "investment." The President's privatization plan would allow a worker's account to be passed down to his or her family. The AARP does suggest that part of the Social Security "surplus" be invested "so that it earns higher returns than offered by U. S. Treasury bonds." Isn't that rich? Instead of allowing individuals to choose the level of risk they deem most appropriate, AARP advocates letting government choose the level of risk for everyone. So much for risk aversion. AARP also advocates raising the Social Security wage cap to $140,000. On one hand, the AARP takes the position that there is nothing seriously wrong with Social Security, that the "trust funds" are safely invested and earning interest and that letting workers choose how to invest their own money would be too risky, on the other hand, they advocate taking on risk and raising payroll taxes. The biggest hurdle to overcome in fixing Social Security is the transition costs incurred if some payroll taxes are diverted into private accounts as the President has proposed. AARP is most concerned about these transition costs, but instead of offering real, practical solutions that will benefit Americans in 2042 and beyond, the AARP is using scare tactics, doubletalk and voodoo economics to justify their head-in-the-sand approach toward maintaining the status quo. When it comes to Social Security, there will be pain felt in this century. The only question is who will feel the pain and how much will it hurt. The AARP wants to move pain into the future where it will be most severe. The President prefers to lessen the pain, but get it out of the way sooner rather than later. More importantly, the position of the President is consistent with his goals of creating an ownership society while the AARP wants to build and maintain a nanny state. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. To submit an article to "What is the Deal?" click here. 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