<<  <  >  >>

Infrequent as they were, if one were unlucky

Table 5

enough to retire at such a time, the objection

Ten Worst Days--S&P 500 Total Return Index 1926­96

suggests that the worker would be financially

Rank

Day

Return

devastated. At best, benefits would be less than

1

October 19, 1987

­20.47%

those from Social Security.

2

October 28, 1929

­12.34%

To test this we assumed that low-, average-,

3

October 29, 1929

­10.16%

high-, and maximum-income workers born

4

November 6, 1929

­9.92%

from 1930 to 1976 invested all of their OASI

5

October 18, 1937

­9.27%

taxes only in the U.S. stock market, earning

6

July 20, 1933

­8.88%

actual annual returns through 1996 and 10 per-

7

July 21, 1933

­8.70%

cent thereafter. One percentage point was

8

October 26, 1987

­8.28%

deducted yearly for administrative expenses.

9

October 5, 1932

­8.20%

Each starts working at age 21 and retires at the

10

August 12, 1932

­8.02%

normal retirement age. Life expectancy is that

assumed by Social Security.22 Retirement bene-

fits are adjusted to inflation and are exhausted at

death. We then calculated how much the market

Table 6

would have to fall at the beginning of retirement

Ten Worst Months--S&P 500 Total Return Index 1926­96

so that benefits would equal those of Social

Rank

Month

Return

Security. Figure 6 shows this for low-wage

workers born from 1930 to 1976. (Columns

1

September, 1931

­29.73%

labeled "Equity Market Crash Required to

2

March, 1938

­24.87%

Equal Social Security Benefit" in Appendix B

3

May, 1940

­22.89%

show this for all income workers.)

4

May, 1932

­21.96%

Contrary to the objection's implication, even

5

October, 1987

­21.52%

if the stock market were to fall as dramatically

6

April, 1932

­19.97%

as its worst day, month, or quarter in history, the

7

October, 1929

­19.73%

market-based system, in every case but one,

8

February, 1933

­17.72%

provides workers of all income levels and dates

9

June, 1930

­16.25%

of birth substantially greater retirement benefits

10

December, 1931

­14.00%

than Social Security.

Yet, it will always be possible to construct a

scenario in which a worker is worse off in a mar-

Table 7

ket-based system.23 Some analysts have posited

Ten Worst Quarters--S&P 500 Total Return Index 1926­96

this by assuming market rates of return will be

Rank

Quarter

Return

dramatically less than the historical record while

also assuming that Social Security taxes will not

1

Second, 1932

­37.68%

go up and that benefits will not go down.

2

Third, 1931

­33.61%

Figure 7 shows nominal rates of return from

3

Fourth, 1929

­27.75%

markets and Social Security for low, average,

4

Third, 1974

­25.16%

high, and maximum wage earners born in 1976.

5

Fourth, 1987

­22.63%

The equity and balanced fund returns are from

6

Fourth, 1937

­21.40%

portfolios previously discussed, and assume

7

Second, 1962

­20.62%

returns during retirement of only 6.5 percent.

8

First, 1938

­18.59%

Administrative fees of 1 percent are deducted

9

Third, 1946

­18.04%

every year. The first rate of return from Social

10

Second, 1970

­18.03%

Security is based on present law. The second

assumes that benefits are cut enough to keep the

Social Security earns consistently less, irrespec-

system's cash flow in balance. For these work-

tive of one's date of birth or income.

ers, markets offer a rate of return, reasonably

Although most future market returns are

estimated to be higher than the government sys-

inherently unknowable, high-quality long-term

tem. Social Security's returns have dropped as

bonds presently yield between 7 and 7.75 per-

the system has matured: a certain characteristic

cent. Also, the spread between stock and bond

of pay-as-you-go financing (see Appendix D).

returns from 1926 to 1996 was about 5.5 per-

Yet, even assuming conservative market returns,

9