Washington , DC, pp. 1521.
1For a detailed discussion of this issue, see Michael Tanner,
"Privatizing Social Security: A Big Boost for the Poor,"
20The
stock portfolio computation, as well as all others in
Cato Institute Social Security Paper no. 4, July 26, 1996.
this paper, assume a portfolio of 90 percent large and 10
percent small company stocks. Historical returns are from
2See
1997 Annual Report of The Board of Trustees of the
"Stocks, Bonds, Bills and Inflation 1997 Yearbook,"
Federal Old-Age and Survivors Insurance and Disability
(Chicago: Ibbotson Associates), pp. 266275, and are geo-
Insurance Trust Funds, p. 67, 208.
metric means. A geometric mean takes into account the
3Ibid.,
p. 185.
compounding of reinvested earnings and is always less
than or equal to the arithmetic mean which is a summation
4Ibid.,
p. 178, and ANYPIA, Social Security Admin-
of the individual annual returns divided by the number of
istration.
returns. For a more formal explanation of the two concepts,
5See
for instance Mitchell and Zeldes, "A Framework for
see Z. Bodie, A. Kane, and A. Marcus, Investments
Analyzing Social Security Privatization," American
(Boston: Irwin, 1996), pp. 775778.
Economic Review, May 1996; Duggan, Gillingham, and
21
See Appendix D or C. Eugene Steuerle and Jon M.
Greenless, "Progressive Returns to Social Security? An
Bakija, Retooling Social Security for the 21st Century:
Answer from the Social Security Records," unpublished
Right & Wrong Approaches to Reform (Washington, D.C.:
paper, 1993.
The Urban Institute Press), Table A.9, p. 290.
6Constantijn W. A.
Panis and Lee Lillard, "Socioeconomic
22
1997 Annual Report of The Board of Trustees of the
Differentials in the Return to Social Security," RAND
Federal Old-Age and Survivors Insurance and Disability
Corporation Working Paper Series no. 9605, February
Insurance Trust Funds, Table II.D2., p. 63.
1996, p. 20.
23See
Dean Baker, "Saving Social Security with Stocks:
7Ibid.
The Promises Don't Add Up," The Twentieth Century
8Ibid.,
p. 14.
Fund/Economic Policy Institute Report, 1997.
9Ibid.,
p. 20. The study also found a lifetime transfer of
24Jeremy
J. Siegel, "Stocks for the Long Run" (Chicago:
$50,000 from men to women.
Irwin Professional Publishing), 1994, p. 31.
10The
age at which a person may first become entitled to
251997
Annual Report of The Board of Trustees of the
unreduced retirement benefits. Currently age 65, but sched-
Federal Old-Age and Survivors Insurance and Disability
uled under present law to increase gradually to 67 for per-
Insurance Trust Funds, p. 178.
sons reaching that age in 2027 or later, beginning with an
26Data
are from the NYSE Daily Market Summary
increase to 65 years and 2 months for persons reaching age
Statistics at http://www.nyse.com/public/market/dmsto-
65 in 2003. (From 1997 Annual Report of The Board of
day.html.
Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, p. 214.)
27See
1997 Trustees Report, p. 178.
11See
William G. Shipman, "Retiring with Dignity: Social
28For
a more formal explanation of this issue, see R. David
Security vs. Private Markets," Cato Institute Social
Ranson and William G. Shipman, "Institutional Buying
Security Paper no. 2, August 14, 1995. Also, Marshall N.
Power and the Stock Market," Financial Analysts Journal,
Carter and William G. Shipman, Promises to Keep: Saving
SeptemberOctober 1981. Also see Jeffrey A. Frankel,
Social Security's Dream (Washington: Regnery Publishing,
Financial Markets and Monetary Policy (Cambridge,
1996), pp. 158166.
Mass.: The MIT Press), pp. 928.
Although the
12This
assumes an equity return of 10 percent in the future
29The
authors are grateful to Karl Borden and Krzysztof
and a bond market return of 7 percent in the future.
future stock
Ostaszewski for their work on this issue. Note that this dis-
Therefore a portfolio of 60 percent equities and 40 percent
cussion does not include any effect of capital deepening,
premium may
bonds yields an annual return of 8.8 percent under these
which will likely lead to long-term increases in both eco-
assumptions.
nomic growth and stock prices. However, the gain from
differ, the
capital deepening is not the issue being raised by critics of
1319941996
report of the Advisory Council on Social
historical
privatization.
Security, p. 146.
record
30Carter
and Shipman, Promises to Keep, p. 169.
14IFC
Emerging Markets Factbook (Washington, D.C.,
1996), p. 17.
suggests it will
31Trudy
Lieberman, "Social Insecurity: The Campaign to
Privatize the System," The Nation, January 27, 1997, p. 12.
15Ibid.
be positive
32For
an extensive analysis of the administrative costs of
16See
"Stocks, Bonds, Bills and Inflation" (Chicago:
various Social Security programs as well as potential costs
Ibbotson Associates, 1997), pp. 4951 for a definition of
of a private system, see Olivia Mitchell, "Administrative
small company and large company stocks.
Costs in Public and Private Retirement Systems," NBER
171997
Annual Report of The Board of Trustees of the
Working Paper #5734, 1996.
Federal Old-Age and Survivors Insurance and Disability
331997
Annual Report of The Board of Trustees of the
Insurance Trust Funds, Table II.F19, p. 124.
Federal Old-Age and Survivors Insurance and Disability
18Ibid,
Table II.B1, p. 34.
Insurance Trust Funds, Table II.C7., p. 52.
19Report
of the 19941996 Advisory Council on Social
341997
Trustees Report, p. 52.
Security, Volume I: Findings and Recommendations,
35Ibid.
15