The Washington Post, Tuesday, September 15, 1998; Page A21
The recent decline in the stock market -- which may have been caused in part by the Lewinsky scandal -- has sharpened the debate over an issue that's far more important than whether this particular president stays in office.
It's the debate over whether Americans should be allowed to invest their Social Security money in their own private accounts -- a public policy argument whose outcome will mean hundreds of billions of dollars to hundreds of millions of people over the next century.
Foes of private accounts are now pointing to the market correction as evidence that reformers are on a reckless path.
"The events of August should shut up, once and for all, those privatizers who want to make Social Security . . . dependent on investments in the stock market," said Rep. Pete Stark (D-Calif.).
Sorry, but this is one privatizer who won't shut up -- and who believes that, as painful as the sharp drop in the market may be, it is fortuitous since it allows both sides of the Social Security debate to join a critical argument at an early juncture.
There is no denying that a market decline will appear far more frightening to people whose life savings are invested in stocks than to those who depend solely on a government-run program.
And stocks have certainly fallen sharply in the past two months. Between its peak on July 17 and last Friday, the Dow Jones industrial average dropped 17 percent, and the broader Standard & Poor's 500 Index (S&P), 14 percent.
Imagine a woman who has been investing in a private stock account, planning to retire in mid-September and purchase an annuity -- an investment that will spew out income for the rest of her life. Thanks to the recent correction, her annuity income will drop by one-sixth.
As former Social Security commissioner Robert Ball put it, "It makes a great difference whether you retire when the market is low or when the market is high. If you turn it into a lump sum and buy an annuity, it governs the way you live for the rest of your life."
But there is a fallacy here. Whether market corrections occur at the beginning, the middle or the end of your investing life does not matter. Yes, you'll feel disappointed by a decline on the brink of retirement, but you will still be far better off with your money in the stock market than in Social Security.
In the current case, while the S&P has dropped 14 percent in two months, that index has, nevertheless, returned 146 percent over the past five years, 362 percent over the past 10 years and 1,833 percent over the past 20 years. (All figures assume that dividends are reinvested.)
The market could drop another 50 percent tomorrow, but an investor who started in 1978 would still have made 10 times his initial investment.
Are we just having a lucky 20 years? No. According to Jeremy Siegel of the Wharton School, stocks have produced an annual average real return of 7.2 percent since 1871. But, for someone born in 1960, Social Security will provide real returns of only between one percent and 2 percent, according to estimates by experts.
The five percentage points that separate stocks and Social Security make an enormous difference. Over 40 years, an investment of $1,000 at 1.8 percent becomes $2,000 but, at 7.2 percent, it becomes $16,000.
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