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Social Security and the Stock Market

Copyright © 1998, 2000, 2003, 2007 by David E. Ross

Congressional Republicans advocate allowing workers to set aside part of their Social Security taxes into individual accounts and invest that money into stocks. Each worker would control the investments in his or her own fund.

On the other hand, some Democrats advocate investing part of the existing pool of Social Security funds into stocks. Workers would not have individual stock accounts. Instead, they would continue to share the current pooled fund that is now invested only in government bonds; but that fund would diversify its investments into stocks.

In less than one month, the stock market — measured by the Standard and Poor's index of 500 stocks — has declined 8.5%. No one knows if stocks will go down another 20% or turn around and continue to climb. Some individual stocks have declined by 50% or more.

Yes, over the next 25 years, investments in stocks are likely to return more than investments in bonds. But you are going to retire in 10 years or even 5 years. Are you willing to buy the Republican proposal, even though there would be no government bail-out if you lose your investment? How much loss would you be willing to accept? Are you willing to buy the Democrat proposal, even if that meant a bail-out from other taxes if a bear market destroys the value of stocks?

Are you willing to trust either proposal when neither party is willing to remove Social Security from the federal budget and stop using the current surplus of revenues over benefits to make the budget look balanced?

8 August 1998

Well, after a decline of nearly 20%, the stock market came back. Congressional Republicans are again beating the drums for investing in stocks — either by the Social Security fund itself or as a replacement for the Social Security program. None of them, however, seem ready to embrace the idea of guaranteeing retirees against a bear market wiping out their pensions.

The problem they are trying to address is real. As today's working "baby boomers" retire, there will be a large increase in individuals drawing Social Security benefits without a similar growth in "Generation X" workers paying Social Security taxes. Further, that increase in retirees will live much longer than did their parents, prolonging the burden on Social Security.

Trying to shift the burden to the stock market will not work! The same demographics that put Social Security at risk create a serious risk of a lengthy downturn in the stock market and a contraction in our nation's economy. Promises to the "baby boomers" based on replacing Social Security with investments cannot be fulfilled.

The current boom in the stock market is partially driven by "baby boomers" saving for their retirements. They look towards a retirement more affluent than can be supported by any combination of Social Security and employer pensions. So they are pouring money into 401(k), IRA, and Keogh plans and into investments that have no retirement-oriented tax shelters. The closer they get to age 60, the more intense they get about saving for retirement. Yes, they are already buying stocks to the limit of their comfort with such a volatile investment.

However, when they retire, the "baby boomers" will not likely reduce their standard of living. First, they will stop adding to their investments and start drawing on the dividends and interest they are earning. Eventually, they will also start drawing out capital from their investments. As a majority of that generation retires, the liquidation of retirement savings will drag the stock market down. Without a large influx of young immigrants, inflows of retirement savings from "Generation X" will not be sufficient to offset the outflows taken by the "baby boomers" and keep the stock market growing. Private pensions — which also invest in the stock market — will find themselves severely underfunded as their portfolios deteriorate just when they too need to liquidate them for retirees. Only the Social Security program — with a guaranty of a specific benefit — will be able to provide retirees with a "safety net" based on an assured level of income.

7 December 1998

With a Presidential campaign underway, this issue is again active. Someday (soon, I hope), the voters will awake to two realities:

Instead of advocating something new to benefit the people, the politicians would replace the dependability and stability of Social Security with the uncertainty and volatility of the stock market.

11 August 2000

In the five years since I first wrote this commentary, we experienced the collapse of the "dot-com" bubble and the bankruptcies of what had been well-regarded corporations: Enron, Worldcom, Adelphia, and more. Those who pinned their hopes on the stock market for retirement found that they had to keep working much longer than they expected.

Yes, there is a role for stocks in a retirement portfolio. But the foundation of that portfolio should be more reliable than stocks. Only Social Security — with a government guarantee of steady monthly payments regardless whether the stock market it up or down — has that reliability.

6 November 2003

Once again, a presidential election is upon us (with campaigning starting much earlier than any voter really wanted). And once again, Social Security reform is receiving some attention from the candidates.

While the Democrats seem vague about how to repair Social Security, several Republican candidates again trot out plans to allow workers to divert some of the Social Security taxes into personal accounts invested in stocks. They seem to forget that it took more than five years for the stock market (measured by the S&P 500 Index) to recover its losses at the beginning of the Bush-II administration. And they don't seem to notice that the market is now 6.3% lower than the peak it reached earlier this year. It almost seems as if the Republican candidates are more interested in pushing stocks back up and generating commission income for brokers than they are in securing a solid retirement for workers.

Real Social Security reform will be far more complicated — and somewhat more painful — than what either political party is willing to contemplate.

28 December 2007

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