It has been well known for some time that Democrats are opposed to capitalism and free markets. There is no hope of enlightenment for these close-minded socialists, who are blindly dedicated to fighting anything the Republican administration wants to accomplish. But it appears there are also quite a few Republicans who have no faith in the economic system their party advocates. Social Security Reform is really a no-brainer, but the debate is becoming filled with demagoguery, misinformation and obstructionism - and many Republicans are just as guilty as the Democrats.
The foundation of the American economy is capitalism and free enterprise - i.e., private ownership of the means of production and distribution of goods and services. Yet many Americans, and Congressmen of both stripes, do not seem to understand what that means. Although much of American business is conducted by privately owned family enterprises and small entrepreneurs, the pure embodiment of capitalism is represented by the stock market. The stock market is the way the majority of ordinary citizens, who don't have the means or the desire to own their own businesses, can participate in the wealth creation generated by free enterprise.
Democrats can be in denial all they want, but the fact remains that changes must be made to the current social security system. The problem is quite simple. Sometime around 2018, only 13 years down the road, the system will start paying out more than it takes in, becoming cash flow negative. Sometime around 2042, only 24 years after that, all the current cash "surplus" now invested in Treasury bills will be gone - meaning that all benefits paid to retirees must be totally funded by payroll taxes. At that time, unless payroll taxes are raised, benefits to retirees will only be 73% of what is promised - and less each year after that. In other words, today's 30 year old's and everyone younger are screwed.
George Bush wants to let the dynamics of free enterprise and private ownership solve the problem by directing payroll deductions to private investment accounts for each citizen rather than disappearing into the vast pyramid scheme that currently exists. Democrats and weak-livered Republicans argue that the stock market is too "risky" to let the average citizen expose his retirement assets to the stock market. Well, THAT DEPENDS ON HOW YOU WANT TO DEFINE RISK.
If each person was allowed to invest his private retirement account in individual stocks of his choosing, then of course it could be argued that the level of risk is relatively high. But that would not be allowed to happen, as the only equity investments that would be allowed would be in a broadly diversified market index fund. Today the social security "surplus" is supposedly invested in U.S. Treasury issues, securities that over time have returned on average more than 6.5% per year less than the Standard & Poor's 500 stock index. To me, investing in low return securities creates a VERY HIGH RISK of minimizing investment returns, and is irresponsible money management. It is the primary reason why the social security trust funds will be depleted by as early as 2042.
Now comes the good part. The research firm of Ibbotson Associates has been compiling for quite some time the annual returns generated by various investments since 1926. Over 78 years, the average annual return of the stock market, as measured by the S&P 500 index, has been 10.4% (The average return for treasury bills is 3.8%). For any individual year the worst return was a loss of 43.3% in 1931, and the best a gain of 54.0% in 1933. So, for any individual year, the risk of loss in stocks is relatively high.
But over time the risk of loss diminishes dramatically. In fact, there has never been a 10 year period (1926-1935, 1927-1936, etc, through 1995-2004) that has experienced a loss. And if you are 42 (25 years until retirement) or younger, you might want to know that the lowest annual return generated by the stock market for any 25 year period is 6.0% (and for 35 year periods the lowest return was 8.0%), significantly above the low returns produced by treasury bills.
Let's assume you are a 30 year old today, making $30,000 a year. Under the current program, you have 6.2% of your salary, or $1,860, deducted from your paycheck for social security. Your employer matches that, so you have a total of $3,720 "invested" for you in your retirement account. Assuming the government invests the $3,720 in treasury bills (which of course it doesn't since most of it is paid right back out to current retirees), in 37 years at 3.8% that would be worth $14,786. Now assume that instead of the $3,720 going to the government, it all went into your equity indexed private account. At the average annual return of 10.4%, in 37 years it would be worth $144,677. That's right, $144,677, nearly 10 times as much. Do the math. The government would have blown $129,891 of your money from just one year's deduction. Mind-boggling, isn't it.
Again, that is from just one year's deduction. The effect is the same no matter what your age, only the future value of each years contribution falls marginally each successive year. And not only does the account grow, it is actually yours and your family's to keep, even when you croak - unlike the current system. On the payout side, the current monthly full retirement check at 67 is around $2,000, or $24,000 a year. In 37 years, at 3.0% inflation (the average rate since 1926), the monthly payout would go to around $6,000, or $72,000 a year. Certainly seems to me that putting each yearly deduction in a private account goes a lot farther toward meeting, and exceeding, that payout than the current program.
I am 56, so George's plan won't effect me at all. But if I was under the age of 55 I would be telling the AARP and each and every congressman that they had better get with the program, or else. And in fact, instead of just 4% being diverted to private accounts, as proposed, I would demand the whole 12.4%.
Steve Doud
March 4, 2005
