Personal Accounts in a Down Market: How Recent Stock Market Declines Affect the Social Security Reform Debate

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The S&P 500 stock index is down almost 40percent from its peak value in 2000. Where doesthat leave the case for personal retirementaccounts, which would allow workers to investtheir Social Security payroll taxes in stocks andbonds through accounts similar to individualretirement accounts or 401(k)s?

The evidence shows that long‐​term marketinvestment for Social Security, while hardly riskfree, bears little resemblance to the “meltdown“scenarios painted by many account opponents.Opponents of personal accounts implicitlyassume that workers with accounts would beshort‐​term investors without any nonstockdiversification. In the real world, the combinationof asset diversification between stocks andbonds and time diversification over long timehorizons reduces the risks that a short‐​termmarket drop could substantially affect workers’retirement incomes. Even in today’s bear market,workers with personal accounts would retirewith higher total retirement incomes than thecurrent pay‐​as‐​you‐​go program is able to pay.

Moreover, personal accounts would allowindividual workers to take on only as much marketrisk as they are comfortable with. The publicrealizes this, and support for personal accountsis higher today than it was at the market’s peak.

If personal accounts would be a good policyeven today, and if they retain public support eventoday, it is hard to imagine a circumstance inwhich they would not. Today’s stock marketdeclines do not contradict the case for personalaccounts. In fact, they confirm it.

Andrew G. Biggs

Andrew G. Biggs is a Social Security analyst at the Cato Institute.