Table 1
Portion of Taxes to Be Invested
Political Preference
Age
Overall Democrat
Republican Independent
1829
3049
5064
65+
6.2%
26.5
26.7
21.7
32.5
41.3
29.9
29.2
11.5
2% or 3%
11.0
13.6
9.0
9.6
11.9
12.9
8.8
10.3
12.4%
27.9
22.0
36.2
25.9
32.6
40.2
27.5
11.8
None
20.4
23.2
17.4
20.4
8.4
11.2
22.3
35.4
Not sure
14.2
14.6
15.7
11.6
5.8
5.7
12.1
31.0
Given the long-term investment horizon
Mixing private investments with traditional
envisioned for workers choosing individual
Social Security is therefore mixing a good
accounts under this proposal, market invest-
investment (private accounts) with a bad
ment is remarkably safe. In fact, over the worst
investment (Social Security). That's not diver-
Traditional
20-year period of market performance in U.S.
sification, it's just bad investment policy.
history, which included the Great Depression,
Moreover, given the lack of property or other
Social Security
the stock market produced a positive real return
legal rights to Social Security benefits, and the
has political
of more than 3 percent. At the same time, we
program's enormous unfunded liabilities, tradi-
risks over and
know that, even under the best of conditions,
tional Social Security has political risks over
Social Security will provide below-market
and above its poor rate of return.
above its poor
returns. As Figure 3 shows, even with recent
Besides, the proposed individual account
rate of return.
stock market declines, a worker investing all of
plan provides an opportunity to diversify risk.
his payroll taxes in stocks would receive bene-
The proposed default portfolio consists of both
fits 2.8 times greater than he would receive had
stocks and bonds. Risk-averse investors can opt
he "invested" the same amount of money in
for a portfolio even more heavily weighted
Social Security.37
toward bonds.
Figure 3
Even after Market Drops, Personal Accounts Would Pay Higher Returns Than the
Traditional System
$350,000
Pers onal account, S&P 500
$300,000
Social Security, notional wealth
$250,000
$200,000
$150,000
$100,000
$50,000
$0
Source: Andrew Biggs, "Personal Accounts in a Down Market: How Recent Stock Market Declines Affect the Social
Security Debate," Cato Institute Briefing Paper no. 74, September 10, 2002.
11