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COMMENTARY - February 2005 Privatizing Social Security Well-known Princeton economics professor Burt Malkiel is providing meaningful, data-driven support of market investing in personal savings accounts as part of Social Security reform. His is a significant endorsement of the Bush plan at a time when critics are popping up all over the political map. According to Malkiel, from 1926 to the present, yearly stock market returns have averaged about 10 percent pre-inflation and seven percent after-inflation. The absolute worst return for a 25-year investor who started in 1929 was six percent; for a 35-year investor it was eight percent. Malkiel recently wrote in the Wall Street Journal, “Long-term investors can invest in the stock market with considerable confidence that they can earn a rate of return far above the one percent to two percent return afforded by the Social Security system.” This is an important defense of personal accounts. Malkiel is the former chairman of the president’s Council of Economic Advisors. He is also the former chair of the Princeton economics department. As such, Malkiel brings enormous credibility to the issue. The Princeton professor also recommends periodic contributions to Social Security in the form of “dollar cost averaging.” Long-term investors who started in the market in 1929 and acted this way got returns averaging seven to 10 percent yearly as the minimal low end of their historical performance. Malkiel recommends asset diversification among stocks, bonds and real estate, along with “rebalancing” over time. In other words, younger workers should have more stocks than bonds in their personal accounts and older workers more bonds than stocks. Setting up stream-of-income annuities for the retirement years avoids the pitfalls of taking everything out of the market at a bad time (like 1929 or 2000-01). Malkiel’s defense of personal accounts comes in response to disingenuous anti-stock market ads from the AARP. Their new slogan is “Social Insecurity.” This campaign is flat-out hypocritical. The AARP advertises no fewer than 38 different stock and bond mutual-fund investments to their members. Of course, the AARP gets a nice fat commission on any of these fund sales. Yet, when steering their membership away from the Bush Social Security reforms, they never cite the long-run positive stock returns discussed in the work of Burt Malkiel, University of Pennsylvania professor Jeremy Siegel, or many other experts. For decades, state pension funds have successfully invested in markets for unionized policemen, firemen and teachers. Ditto for the federal Thrift Savings Plan on behalf of the executive and legislative branches in Washington. A recent Gallup poll showed that while 71 percent of Americans believe the Social Security system is either in crisis or has a major problem, folks also think – by a huge 55 to 40 percent margin – that investing some of their Social Security taxes in stocks or bonds is a bad idea. It may be that the White House and the Treasury are spending too much time worrying about benefit cuts and the so-called transition costs of Social Security, and not enough time talking up the superiority of market-driven benefits for future retirees. They’ve also been too quiet about the benefits of Social Security “ownership” for the spouse, child or other family heir of a deceased breadwinner. Ownership and retirement returns can carry the day for President Bush. At bottom, if folks understand the trade-off between another bankrupt government entitlement and the history of dependable market returns, they’ll support the market.
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