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HOW NOT TO FIX SOCIAL SECURITY
Stocks are too risky for retirees
For those who believe that Social Security should be privatized, the times could not be more propitious.
On the one hand, Bill Clinton has responded to widespread public anxiety by vowing to save the system so that future benefits are secure. On the other, the stock market remains buoyant after doubling in just three years. So it's no surprise that some Social Security critics are pressing harder than ever for reforms that would permit workers to invest a healthy chunk of their payroll taxes in stocks via individual accounts.
One economist who demurs is John Mueller of economic consultant Lehrman Bell Mueller Cannon Inc. Writing in Challenge magazine, he argues both that the stock market is too risky to depend on for retirement income for most people and that it is likely to underperform in coming decades.
Mueller concedes that stocks have produced an average real annual return of about 6.2% since 1880 (5.2% if one subtracts a 1% yearly management fee), whereas future retirees can expect an inflation-adjusted return of only 1.4% or so on their Social Security contributions. But he notes that such positive returns were far from steady. Indeed, the market has posted annual declines about a third of the time since 1900.
Moreover, these drops were not random but tended to occur in three 20-year periods: 1901 to 1921; 1928 to 1948; and 1962 to 1982. Mueller calculates that average annual real returns (including dividends, but minus management fees) during these periods were either negative or less than 1%. Their 20-year duration is significant because most families only save big for retirement in the last two decades of their working lives.
What this means is that someone who invested in stocks and then retired during one of these periods stood a strong chance of winding up with little or no gain in inflation-adjusted terms. By contrast, investors lucky enough to retire in other periods could have racked up real average gains of as much as 10% a year.
Mueller's point is that this degree of risk, which could hurt a generation of retirees, is too high compared with the small but secure real return projected for Social Security. Further, he doubts that stocks will produce the large returns many experts anticipate.
One reason is that the market tends to perform badly when the number of middle-aged workers falls relative to young workers in their household-formation years. This will soon start to happen as the relatively small Generation X displaces baby boomers in the peak saving years and a larger group of echo-boomers (baby boomers' kids) enter their peak borrowing years. Stocks also may suffer when retiring boomers start liquidating their private pension savings.
Secondly, Mueller notes that Social Security's future woes are predicated partly on the assumption that future economic growth will slow sharply. But the stock market's fate also depends on economic growth, so it, too, would lag behind its historic performance. On the other hand, if productivity and economic growth prove stronger than projected, the return on Social Security contributions will rise, and the system will face far smaller problems.
"We need to restore Social Security's long-run solvency," says Mueller, "but privatization is not the answer."BY GENE KORETZReturn to top
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THE STURDIEST SAFETY NETS
Two programs keep hunger at bay
A new analysis of the impact of government programs on poverty underscores the importance of Social Security to the elderly and of the earned income-tax credit to low-income children.
According to the Washington-based Center on Budget & Policy Priorities, Social Security alone lifted 37% of the elderly, or 11.7 million seniors, out of poverty in 1996--nine times as many as all other government support programs, including such noncash benefits as food stamps and housing assistance. It also kept an additional 4.3 million adults and children, mainly disabled workers or dependents of deceased workers, from falling below the poverty line.
Meanwhile, the Earned Income Tax Credit, which supplements the wages of low-income working families, has emerged as the largest single program to ameliorate child poverty, accounting for 37.3% of the 5.3 million children moved out of poverty by all government programs in 1996. Overall, however, the center notes that the number of children lifted out of poverty fell by 400,000 in that year, partly as a result of the improving economy but mainly because of cutbacks in other government support programs.BY GENE KORETZReturn to top