Parenting & Family Quote by John Shadegg

Shadegg sounds an alarm about the arithmetic of compounding and the politics of promises. A long-run return of 1.6 percent or less means that a lifetime of contributions grows too slowly to finance adequate retirement income, especially after inflation. Spread across four decades of work, small differences in real returns have outsized effects on outcomes. His warning reflects the pressure on pay-as-you-go systems like Social Security, where the implicit rate of return depends on wage growth, fertility, and the ratio of workers to retirees. As populations age and worker-to-beneficiary ratios shrink, the system’s internal return tends to fall. If that return drifts toward zero or below, younger cohorts can pay more in present value than they receive, undermining the program’s perceived fairness and adequacy.

The context is the long-running debate over Social Security reform, notably in the early 2000s when advocates pushed personal accounts to capture higher market returns. The 1.6 percent figure aligns with estimates showing declining returns for younger, higher-earning workers under current law. Shadegg leverages that estimate to argue for change now, before compounding locks in shortfalls for children and grandchildren.

Yet the focus on returns alone sidesteps what Social Security actually buys: insurance against longevity, disability, and inflation, and a progressive floor that reduces old-age poverty. Market investments can offer higher expected returns but come with sequence risk and volatility that individuals may not be able to bear, especially near retirement. The real policy question is how to balance adequacy, risk pooling, and sustainability.

There are many levers besides privatization: adjusting the payroll tax cap, modifying the benefit formula, indexing changes, gradually raising the retirement age, encouraging immigration and labor force participation, and improving productivity. Shadegg is right about the danger of low compounding and demographic math. Whether the remedy is higher returns through markets, more revenue, slower benefit growth, or some mix, the goal is the same: a system that both pays what it promises and provides enough to more than minimally get by.