February 2, 2005


Social Security, stocks link carries risk (Charles Stein, February 2, 2005, Boston Globe)

Over the past 80 years, owning stocks has been a good deal for investors. On average, stocks have returned about 10 percent a year since 1926.

So if Americans invest in stocks through private accounts as part of an overhaul of the Social Security system, they can expect returns of around 10 percent, right?

Not necessarily, say many academics and economists, who concede that while market investments may perform well in the future, good returns are far from guaranteed.

''It is not as if they are a fact of nature," said Robert Shiller, a Yale University economist.

Over the long run, the ''total return" from stocks (meaning their dividends plus price appreciation) easily beat more conservative investments like government bonds. But stocks have higher risk. And when those risks are properly accounted for, say economists, the returns don't look anywhere near as good.

''Focusing solely on the expected return to stocks, without adjusting for risk, overstates the contribution of private accounts to retirement income security," wrote Alicia Munnell in a recent paper called, ''Yikes! How To Think About Risk." Munnell is the director of Boston College's Center For Retirement Research.

If stocks are a sure thing, Munnell argued, then the government should go out and borrow money, invest the proceeds in stocks, and use the profits to eliminate taxes and the federal deficit. The fact that the government would never consider such a policy, says Munnell, is an acknowledgement of the risks stocks carry.

Bill Clinton, of course, proposed investing the Social Security trust funds in stocks in order to increase the return on our money, but the idea was dismissed out of hand, not because it wouldn't work, but because having the government control corporations is too dangerous and anti-American.

Posted by Orrin Judd at February 2, 2005 8:30 AM

More straw man arguments here. These "experts" and "economists" pretend like huge pension funds simply don't exist. Downside risk in the stock market can be mitigated by 1) holding low or non-correlating asset classes in the overall portfolio and/or 2) simply using part of the capital to hedge downside risk with derivatives. It's neither novel nor rocket science. Giant insurance companies have been doing it quite successfully for years.

Posted by: John Resnick at February 2, 2005 1:08 PM
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