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quarter was 517.4 million shares and the aver-

Figure 6

age price was $41.97. The average daily dollar

Equity Market Crash Required for Market Benefits to Equal Those

volume was $21.7 billion. If the new savings

of Social Security for a Low-Wage Worker vs. Actual Annual

were invested daily, then they would equal 6.3

Historical Returns

percent of trading volume or only 25 minutes of

the six and one-half hour trading day.26

60

As time passes they would account for even

less. Social Security estimates that taxable pay-

40

roll will increase in real terms by about 1 percent

per year.27 Holding the tax rate constant, the tax

revenue to be invested would also increase by

20

the same 1 percent. If the stock market's real

annual return exceeds 1 percent--it has aver-

0

aged 7.6 percent from 1926 through 1996--then

the invested payroll tax becomes less and less a

­20

Actual Annual Stock Market Return

percent of the market. Assuming historical real

Percent Stock Market Would Have

rates of return, in 10 years the OASI tax would

to Fall to Purchase Annuity Equal to

­40

Social Security Benefit

represent 16 minutes of daily trading (Figure 8).

The impact on the market would be less sig-

­60

nificant than the above analysis implies.

Investment guidelines, as described in Objection

#2, would require diversification across asset

­80

classes and borders. Assuming domestic stocks

comprise 60 percent of portfolios, then related

Year/Year of Birth

trading would account for only about 9 minutes

a day in 10 years.

*Changes are Large Company Stocks Total Annual Returns from Ibbotson and Associates, Stocks, Bonds, Bills and

Inflation, 1997 Yearbook.

Beyond the issue of the OASI tax as a per-

centage of trading volume is the implication

from the objection that money going into the

Figure 7

market causes stock prices to rise. The common

Nominal Internal Rate of Return for Workers Born in 1976: Markets,

term for this purported causality is "buying

Social Security under Current Law, and Social Security Assuming Cash

power."28 It employs the following logic: If

Flow Is Balanced by Cutting Benefits

Social Security taxes were to go into the market,

and if the supply of stocks is relatively fixed,

9.00%

then by the law of supply and demand stock

prices must rise. Given that for every buyer

Social Security

8.00%

Current Law Return

there is a seller, who with each transaction is

taking money out of the market, then the logic

Social Security Return

7.00%

Assuming Cash Flow is

could just as well be expressed from the seller's

Balanced by Cutting

6.00%

point of view, in this case referred to as "selling

Benefits

pressure." Specifically, with all the money com-

5.00%

ing out of the market, again assuming that the

supply of stocks is relatively fixed, then by the

4.00%

law of supply and demand stock prices must

fall. For any given transaction it can't be both. In

3.00%

fact, if all we know ahead of time is the money

2.00%

flows associated with a transaction, then we

have no knowledge as to whether stock prices

1.00%

would go up, down, or stay the same. The

change in stock prices is more reasonably

0.00%

Low

Average

High

Maximum

caused by a change in information about the

Wage

Wage

Wage

Wage

economic value of the firm or the market gener-

ally. The transactions then reflect readjustments

Internal rate of return calculations assume payments equal to OASI, employee and employer tax, and benefit payments from the normal

of investors' asset class preferences; they are not

retirement age to the Social Security Administration's projection of life expectancy at age 65. Market assumptions are the same as those

the cause of the price change.29

used previously.

11