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percent of the time.24 By using current market

Figure 4

prices and established patterns that have existed

Frequency of Monthly Returns

for decades upon decades, it is reasonable to

posit average annual equity nominal returns,

400

over the long run, of 8 to 12 percent.

However, should some workers be influenced

350

by an opposing view--that government-run

Social Security would provide them higher

300

returns and benefits than markets, even in the

face of all the evidence to the contrary--then

250

under most privatized structures they would

have the right to stay in the system, as others

200

would have the right to leave it so they can save

and invest for themselves.

150

100

Objection #5: Markets cannot

handle the volume of investment

50

capital that a privatized system

0

would create. This inability could

cause a near-term "speculative

Return

bubble" during the years baby

boomers are paying into the

Note: Returns are calculated from the S&P 500 Total Return Index.

system and then a market

collapse as they withdraw funds

Figure 5

Frequency of Quarterly Returns

in their retirement years.

160

Critics of market-based Social Security have

suggested that the flood of new capital as a

140

result of privatization would cause a near-term

"speculative bubble" during the years baby

120

boomers are paying into the system and then a

market collapse as they withdraw funds in their

100

retirement years. However, the actual volume of

new investment is unlikely to have a significant

80

short-term impact on stock prices.

The 1997 taxable payroll subject to the Old-

60

Age and Survivors Insurance tax of 10.70 per-

cent is estimated to be $3.229 trillion.25 The

40

amount saved and invested depends on the mar-

ket-based reform that is accepted, but it most

20

$

probably would not exceed $346 billion (.107

3.229 trillion).

0

The impact of privatization on capital mar-

kets depends upon which markets receive the

Returns

money and how liquid they are. To use a highly

unlikely and restrictive case, assume that all the

Note: Returns are calculated from the S&P 500 Total Return Index.

savings stayed in the U.S. and were invested

only in stocks listed on the New York Stock

cent. Although the future stock premium may

Exchange (NYSE). For 1997 the NYSE is

differ, the historical record suggests it will be

scheduled to be open 253 days, with minor

positive: for all 30-year periods from 1802

exceptions from 9:30 AM to 4:00 PM. The aver-

through 1992, stocks outperformed bonds 99.38

age daily share volume during this year's first

10