Stocks and Social Security
A closing thought. The recent hairpin turns in the stock market raise
cautionary questions about proposals to partially privatize Social Security
so that workers can invest a fraction of their payroll tax in the stock
market. The privitization idea is often sold as a way of allowing workers
to earn lush stock market returns on some of their Social Security dollars.
But higher returns come with higher risk.
To be sure, over the long haul stocks have bested bonds by a wide margin.
Yes, some two centuries of U.S. stock market history suggest that the risk
of owning equities compared to alternative financial investments shrinks
with time. But the risk doesn't disappear. Put it this way: Stock returns
would not beat out bonds and bills with time if there wasn't a good chance
that bonds and bills could do better than stocks for lengthy periods.
Financial history confirms that insight. For instance, bonds outperformed
stocks from 1831 to 1861. Another example comes from Steve Leuthold, the
well-known portfolio manager and market historian. He asks how long did it
take for the investor in risky stocks to catch up with the investor in
riskless T-bills following the 20 bear markets of the past 100 years? The
longest "catch up" period was 17 years, measured from 1968 until 1985,
assuming all dividends were reinvested. The comparable calculation from the
1929 peak was 15 years. The average catch up period was 5 years and one month.
It's a national disgrace, but only half of American workers have easy
access to a pension plan offering a variety of investment options. Yet it's
doubtful that transforming the low-risk Social Security guarantee into a
riskier pension plan is the best way to boost everyone's retirement savings.
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