Somehow in all of the hand-wringing over the stock market’s recent “correction,” we have not heard from one small group that has been so vocal before Wall Street’s woes: the organized lobby that wants to privatize Social Security. That begs a vital question for public policy-makers as they debate how to fix the system.
What do retirees do in a privatized scheme when the market tanks in the year in which they retire?
Under the current system, not only is your retirement benefit guaranteed, it’s indexed to inflation and is based on a formula that figures in years worked and average salary. Would the new, privatized system have such a guarantee, or even an option for one if you chose not to invest money on your own?
The Cato Institute, the libertarian lobby largely fronting the privatization push, is correct in noting that over the past 60 years, stock market returns have averaged around 10 percent per year (based on the Standard & Poor’s 500 index). That handily beats government bonds (around 6 percent) and money-market instruments or “cash,” which are half of the average return of bonds and don’t keep up with an average inflation rate of just under 4 percent.
There is this nasty sticking point, however, that the Cato contingent has not fully acknowledged. Say you had a portfolio of $250,000, most of your assets were in blue chips (like the Dow industrials) and you were retiring by Labor Day. A 4.67 percent decline would leave you $11,675 poorer (the Dow 30 index was down 4.67 percent from January to August of this year alone). If we are in a full-blown bear market–signaling a drop of 20 percent or more–your retirement kitty would be off $50,000. Would a privatized system make up the difference? Not likely. You’re on your own.
Although we are essentially in a free-market economic system, sometimes a little progressive capitalism that protects retirement savings while giving somewhat better returns would be in order. Maybe government oversight of stock-market index funds that will invest a portion of Social Security funds doesn’t seem like such a bad idea now.
Nest eggs tend to get scrambled when the bear runs loose.