The stock market has been pretty stagnant. Despite one rate cut after another by the
Federal Reserve, the market shows no signs of reverting to its 1990s performance any time
soon. One casualty of a bear market is likely to be the campaign to privatize Social Security.
President Bush has appointed a commission on Social Security that includes only members in favor of
at least partial privatization of the program. The privatizers argue that the stock market over time pays
a better rate of return than Social Security. Supposedly, if we allow people to put at least part of their
payroll tax contributions into personal accounts, they will retire with more money.
Moreover, this higher rate of return is touted as the cure for a system projected to run serious red ink in
30 or 40 years. If people can put some money into personal accounts, supporters argue, Social
Security's financial shortfall will ease because so much more income will accumulate.
Put aside for a moment the fact that Social Security is much more than a kind of government-run IRA.
For one thing, no matter how long you live, the checks are guaranteed. For another, Social Security is
always indexed for inflation, and it also insures against the early death of a breadwinner. But leaving that
aside, would the stock market really be a better deal?
There are several reasons to think not. Supporters of privatization point to the fact that during the past
century, stocks increased in value over the long term at about 7 percent a year.
But there are two big reasons to doubt whether the future will reflect the past. For starters, stock
indexes increased more than fivefold during the 1990s, and despite the tech stock collapse, the broad
market is down less than 20 percent from its peak.
That means that even if stocks do average 7 percent a year over the long term, the market has taken
much of the next several decades of appreciation in advance. Stocks increased by a lot more than 7
percent annually in the past two decades. Therefore, we may well face a somewhat flatter market in
decades to come.
Moreover, the Social Security trustees - the source of the rather pessimistic projections about shortfalls
in the trust funds - in the middle of the new century are projecting that economic growth will slow to
under 2.5 percent in years to come. But with that sluggish rate of economic growth, there is no way the
stock market can enjoy sustained increases of 7 percent unless all the economic growth goes into
corporate profits rather than wages.
On the other hand, if the optimists are right and the new economy is capable of higher growth rates such
as those we've enjoyed in recent years, then a lot more payroll tax receipts will pour into Social
Security's coffers - and the vaunted crisis will be deferred indefinitely.
In other words, the economic projections that supposedly doom the current Social Security system
would also doom the stock market solution. And the adjustments in our assumptions about growth
rates that are necessary to rescue a privatized system would also rescue the public system.
There's another big problem with the stock market solution. It concentrates the risk of a down market,
or of bad investment decisions, in a single individual.
Under the current system, retirees are free to be as speculative as they desire with IRAs, Keogh
accounts, 401(k)s, and, of course, with one's own savings. But no matter how bad your investment
strategy, your luck, or your timing, Social Security is the one part of your retirement portfolio that is
government guaranteed. Even in a severe recession, when you need economic security most, Social
Security is recession-proof.
One pension fund adviser, criticizing the general shift from company pensions to personal retirement
accounts, makes the following argument: You wouldn't self-insure your house, or your car, or your
health. That is, you wouldnt take on all of the risk yourself. So why would you self- insure your
The idealized picture of a people's capitalism in which everyone is a stakeholder has much to
recommend it. The only flaw in the picture is that occasionally the market tanks, big time.
In such moments, we are very grateful for Social Security checks, an income stream that protects
individuals and also helps sustain the larger economy. So by all means let's encourage broad diffusion of
shareholding, but not at the expense of Social Security.