Two days ago, BTP praised the Post for printing a column by Robert Ball arguing that Social Security is essentially sound. Some folks may have wrongly thought I was endorsing all of Ball’s arguments, in particular his argument for investing a portion of the Social Security trust fund in the stock market. While I am not necessarily opposed to investing the trust fund in the stock market it is important to talk about the costs and benefits honestly. I will leave off discussion of the costs for another day, but we should be clear that any honest accounting shows the benefits to be very minor. As I demonstrated with my “No Economist Left Behind Test” a couple of years ago, the privatizers were making up numbers when they claimed they could get 7 percent real returns by investing money in private accounts in the stock market. The stock returns that are consistent with the trustees (or CBO’s) projections of GDP growth are approximately 5.0 percent a year. If you contrast the 5.0 percent real return that you can expect from investing the trust fund in the stock market, with the 3.0 percent return projected for the government bonds currently held, the difference ends up being relatively small. Since we are already past the peak surplus years for the trust fund and heading downward, the amount that is available to invest is also projected to dwindle rapidly through time. Using the trustees numbers, the gain from investing every projected dollar of tax surplus in the stock market would be equal to approximately 0.09 percent of taxable payroll, less than 5 percent of the projected shortfall. This is arguably still a policy worth pursuing, but the benefits to the program are very modest at best.
--Dean Baker
