Have Plunging Stocks Killed Private Accounts in Social Security?
By: Source: AARP Bulletin Today Date Posted: 2003-09-03 13:50:00-04:00
Yes
Plunge Reveals Plan's High Risks
By Dean Baker
Until the recent fall in stock prices, many people viewed the stock market as a money tree that created wealth out of nothing. This was the atmosphere in which the idea of private accounts within Social Security gained popularity. The crash has helped to clear people's thoughts.
In reality, the stock market does not create wealth. Wealth is created when we are better able to produce goods and services. Putting Social Security dollars in the stock market through individual accounts does not increase the nation's productive capacity by one iota, compared with putting the same dollars into the Social Security trust funds. As the crash shows, individual accounts only add risk.
Many proponents of private accounts actually want to cut benefits. Since Social Security is fully solvent until 2041, and the shortfalls projected for later years are comparable to past shortfalls, benefit cuts seem hard to justify. But if politicians want to advocate cuts in benefits, they should be forced to do so explicitly, and not hide behind the Enron-like accounting of private accounts.
The market crash also clarified which part of the retirement system needs fixing. Millions of workers who saw much of their retirement savings disappear in the crash are now very glad that they can still count on their Social Security. On the other hand, we now recognize that the system of private pensions is in disarray.
Pensions have been manipulated to their administrators' benefit and are subject to high fees, and many workers lack pension coverage altogether. If the Bush commission's individual accounts were offered as a voluntary add-on to Social Security—instead of taking money from Social Security revenues and cutting benefits to make up for the lost revenues—they could be very useful. Such accounts would instantly make a low-cost, fully portable, defined contribution pension plan available to every worker in the country.
Dean Baker is the co-director of the Center for Economic and Policy Research and co-author of Social Security: The Phony Crisis (University of Chicago Press, 1999).
No
What Counts Is the Long Term
By Andrew G. Biggs
Slumping stocks have opponents of adding personal accounts to Social Security claiming vindication. But the facts show that, even today, personal accounts would increase benefits and help strengthen Social Security long term.
Imagine the following deal: You could invest part of your Social Security taxes in a personal account. However, your account could hold nothing but stocks and you would retire during the biggest bear market since the Great Depression.
Would you accept such a deal? I would. Because even today, personal accounts would increase benefits while giving workers greater ownership and control over their savings.
However bad the market's recent performance, a worker retiring today would have begun investing in the late 1950s. The stock market has never once lost money over the long term. Even a worker retiring in the 1930s would have received a 4 percent return after inflation.
A worker retiring today with an account holding only stocks would have received about 6 percent annual returns. That's lower than the 7 percent historical average, but still a lot better than the 2.5 percent return an average couple can expect from the current program. Higher rates of return, compounded over decades, could double or even triple a worker's retirement nest egg.
Even so, today's stock market is scary. That's why most workers diversify as they age. A typical worker in his 60s, who has only 40 percent of his assets in stocks, would have lost just 3.25 percent on his total portfolio last year. Stocks fell, but bond prices rose. That's the power of diversification.
Finally, personal accounts would be voluntary. No worker is forced to take one, and no worker is forced to invest even a penny in the market.
Personal account opponents claim that accounts would have lost billions in the last four years. They don't mention how much workers would have gained over the past 40, not just in dollars, but in ownership and personal security.
Andrew G. Biggs is a Social Security analyst at the Cato Institute in Washington and was on the staff of President Bush's Social Security commission.
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