“The market is falling! The market is falling!” Like a flock of ChickenLittles, opponents of Social Security privatization warn that recentdeclines in stock values prove that private investment is too risky. Recentevents have shown that stocks can go down as fast as they can go up. But isthe market risky compared to Social Security? No.
For the last several years the stock market rode a wave of expansion. Acorrection was inevitable. So what? For retirement purposes, year-to-yearmarket fluctuations are irrelevant compared with the long-term trends overthe 40 or more years of a person’s working lifetime. And there is no 40-yearperiod in history in which an investor would have come close to losing moneyin the stock market. In fact, the worst 20-year period in U.S. history,encompassing the 1929 crash and the Great Depression, produced a return ofmore than 3 percent after inflation. The average 20-year real return hasbeen around 7 percent.
The current bear market is painful. But let’s put it in perspective. Aworker retiring at 65 today would have started investing money in hisprivate account in the mid-1950s. At that time, the Dow was in the low 400s.Someone in his 40s today would have started investing when the Dow wasaround 1,500. It would take a lot more than the recent slump to wipe out thegains those workers have seen. William Shipman and Melissa Heiger of StateStreet Global Advisors estimate that the market would have to drop 65percent for an average worker retiring this year to end up with personalaccount benefits lower than those Social Security could provide.
Indeed, even with recent declines, it is hard to overstate how much better adeal private investment remains. If an average-wage earner retiring todayhad invested his payroll taxes he would have a retirement nest egg, evenafter the recent plunge, of more than $460,000. Sure, that’s less than atthe market’s peak, but it would provide for an annuity of nearly $4,000 permonth. In contrast, Social Security promises benefits of barely $1,000 permonth.Worse, Social Security can’t guarantee its promised benefits. The programwill begin running deficits in 15 years and will be more than $22 trillionin debt over the next 75 years. Unless payroll taxes are raised, benefitswill have to be slashed by a third. Now that’s a bear market.
Of course, the above examples assume that workers invest exclusively instocks. But if workers thought that stocks were too risky, they would befree to invest in bonds, money market funds, annuity contracts, and otherconservative investments—and still earn a higher return than under thecurrent system. Many workers would do better stuffing the money under amattress.
In practice, most workers would invest in a balanced portfolio that includedboth stocks and bonds. Given a portfolio of 60 percent stocks and 40 percentbonds, the stock market would practically have to be wiped out to makeindividual accounts a worse deal than Social Security. Even if the stockmarket went out of business on the day of a worker’s retirement, the bondsalone remaining in his account could in most cases pay higher benefits thanSocial Security.
Where then lies the risk? Is it riskier to rely on markets that have neverfailed to produce positive long-term results, or on a politically dependentintergenerational transfer—a welfare program—that is financially insolventand guaranteed to produce below-market returns for most workers? Given thechoice, we know where most young workers would rather put their money.