Why Personal Accounts Would Work
A good actor can
take someone else's words and make them believable. A good
columnist can, too.
Recently, syndicated columnist Michael Kinsley latched on to an
idea first floated by actor Rob Reiner. Kinsley and Reiner want to
prove that personal retirement accounts (PRAs) for Social Security
cannot work. But their arguments are simply wrong.
Kinsley and Reiner claim that there is no way a conservative
portfolio of stocks and bonds can grow at an average rate of 4.7
percent annually (after inflation) if the economy grows as slowly
as Social Security actuaries predict. That 4.7 percent return is
important; it's what The Heritage Foundation estimates a PRA would
earn after inflation. Although Kinsley didn't mention it, our
prediction is based on a portfolio that consists of 50 percent
stock index funds and 50 percent government bonds.
Such a return is possible and even likely. A new study by the
London Business School shows that stock market returns are higher
on average in slower-growing economies than in rapidly growing
ones. The study found that investors earned 12 percent a year
buying in down markets and only 6 percent when market growth was in
the top 20 percent.
Just three days before Kinsley's column was published, Stephen C.
Goss, the nonpartisan Social Security chief actuary, used precisely
the economic assumptions criticized by Kinsley to project that over
the next 75 years, "the long-term ultimate average annual real
yield assumed for equities [stocks] is 6.5 percent." Congressional
Budget Office estimates echo Goss' numbers.
Kinsley and Reiner also claim that if the economy grows faster than
the actuaries predict, Social Security's problems will be solved
without personal accounts.
But several studies, including data from the nonpartisan Social
Security actuaries, show that there is virtually no chance that
faster economic growth could solve Social Security's coming huge
In fact, higher economic growth would make the problem worse. Yes,
higher earnings would increase the amount of Social Security
payroll taxes collected in the short run. But because benefits are
linked to wages, they also would increase the amount of retirement
benefits that would have to be paid.
The actuaries do admit that there is a 2.5 percent chance the
economy could grow fast enough to solve Social Security's problems.
Of course that also means that there is a 97.5 percent chance that
it won't. It certainly doesn't make sense to gamble our children's
retirement security on such odds.
Most disturbingly, Kinsley also writes: "But if free markets work
the way they are supposed to -- and I would like to hear The
Heritage Foundation say that they do not -- the effect of the
government's announcing that government bonds are a bad investment
and officially pushing people to put their money elsewhere will be
to make it more expensive for the government to borrow money. So
even if private stocks and bonds are a better long-term investment
than government bonds (after factoring in risk and so on), they
won't stay that way for long."
This makes little sense. No one is saying that real government
bonds (as opposed to the non-negotiable "bonds" that substitute for
real assets in the Social Security trust fund) are a bad
investment. Our projections, as noted above, are based on PRAs that
are 50 percent invested in government bonds. The Bush proposal
assumes that 20 percent of PRAs are invested in government bonds.
Government bonds are a fine investment for people who want to avoid
risk and can afford the lower returns paid by government
On the other hand, stocks and other types of bonds pay a higher
return in part because they have a higher risk level. Stocks and
bonds rise and fall by the day, week and month. However, over long
periods such as 20 years or more, they almost always rise at a
significant annual average rate.
This is what makes stocks and bonds perfect for retirement
investing. Holding them for 20-plus years virtually guarantees
significant profits at a fairly low risk level. A system of PRAs
would increase demand for both stocks and government bonds. There
is no reason to assume that demand for either will fall or that the
risk-based difference between what each pays will change
significantly from the SSA or CBO projections.
We can have personal accounts that allow individuals to build
retirement nest eggs they will own and control. In fact, such
accounts are the only proposal on the table that can preserve
Social Security for decades to come. The time to act is now.
John is a senior research fellow for Social Security at
the Heritage Foundation.
Distributed nationally on the Knight-Ridder Tribune wire