HEMPSTEAD, N.Y. (MarketWatch) — Those who advocate creating personalSocial Security accounts that could invest in equities in order toboost returns overlook the fact that the stock market goes down aswell as up — sometimes for long periods of time.True, over the long run, stocks do tend to outperform bonds. For example, over the past 40 years, the total return from investingin common stocks (price appreciation plus reinvested dividends) wasalmost 12 percent. By contrast, the Social Security trust fund hasearned just 7.5 percent from its investments in government bondsduring this same period.
(Bill Hynes’ comments: That did individual SSI retirees absolutely no good at all, as thatmerely increased the value of the bonds that are really IOU’s thatreplace the money collected from us via SSI taxes and promptly spentas part of the General Fund. That great Democratic friend of the poortaxpayers, Lyndon Johnson saw to it that all that money coming in didnot go to the fictitious “Lock Box” but right into the GovernmentGeneral Fund and was replaced by IOUs called government bonds What itdoes is slightly postpone the day of reckoning when the total value inbonds has all been consumed in payments to SSI recipients and paymentshave to be paid by current taxes. Of course, even when the bonds areused to pay retirement they are just another IOU, and the bonds haveto be redeemed out of then current tax receipts … or more new bondssold to raise the necessary cash.)
(Dr. Kellner continues)But as the great economist, John Maynard Keynes once said: “in thelong run we’re all dead.”Long run trends notwithstanding, stock prices do not go up every year.Believe it or not, there have actually been years in which investorshave lost money in the stock market. Remember 2000, 2001 and 2002?Still not impressed? How about the fact that it’s been over five yearssince the Dow Jones Industrial Average hit its all-time high? That’sthe longest stretch without a peak for the Dow since the 1973-82period.But the market actually stagnated far longer than nine years. The Dowfirst reached 1000 back in January 1966 and didn’t move above it onceand for all until August 1982, in essence going nowhere for16-and-a-half years.And just in case you forgot, after the stock market crashed in 1929,it took fully 25 years for the Dow to surpass its previous peak!What do you think would have happened to the nest eggs of those whohad the bad luck to retire during these down years, if they had todepend on personal investments for part of their Social Securitybenefits?
(Bill Haynes Comments Continued) I don’t have the actual figures, but on Fox today someone compared the value of the three main indexes, Dow Jones, NASDAQ, etc., over several time periods and the NASDAQ was up over ten fold. It is easy to come up with bad periods if your goal is to exploit the ignorance of some people, and the bad memories of the depression generation and their offspring. But even those with 401k’s damaged by the ’98 bubble are not cashingout and relying on SSI, alone.)
Here’s another conundrum. Those who believe that the Social Securitytrust fund will run out of money by 2042 are referring to theactuaries’ intermediate projection, which assumes an average annualrate of growth of only 1.9 percent per year over the next 75 years.
(Bill continues: What has the growth in GDP got to do with it? As I pointed out [and this guy is trying to avoid saying] is that the bonds growth doesabsolutely nothing to help the individual SSI recipient. S(he) will getwhat the law presently says they will get, whether the bonds are paying moreless, or nothing at all !)
As I said in my column of Feb. 8, this is much too conservative. Butfor argument’s sake, let’s assume that this is the rate at which theeconomy will grow.If this is the case, there is no way that returns from stocks aregoing to be 4-1/2 points better than returns from bonds.
Bill Continues: This guy is shameless! And if the opposition to private investments are this willing to mislead, they are truly desperate!)
Again, using long-run data, stock returns tend to be based on economicgrowth. This will generate a rise in earnings at a similar pace. Addin dividends, the price-boosting effects of stock buybacks along withthe occasional burst of productivity, and the return from investing instocks would more likely average about 4-1/2 percent under thisscenario before adding in inflation.
(Bill continues: Once more into the breach; he pulls 4 1/2 % out of his you-know-what and justifies it with an off hand “more likely”. If, as he says, theeconomy will grow even faster, then the value of stocks will also go upfaster. After all, what is the difference between “the economy” and theStock Market? Those are essentially two names for the same thing.)
Bonds? Their real rate of return historically has averaged around3-1/2 percent.
(More from Bill: This guy is truly shameless! As I have said several times here,increases in bond values helps the government pay back what they havebeen stealing by spending the SSI Tax Receipts, but does absolutelynothing to increase SSI retirement checks. In fact, if you think aboutit, it doesn’t even really do that, because if the interest on thoseIOU’s er, I mean bonds, does go up, then the annual bill to cover thedeficit (and that is a major item in the annual Federal Budget) goes upaccordingly … because that’s where the payment of that interest hasto come from. That’s right … there ain’t no free lunch. But there is compound interest, which is what investors enjoy fromtheir stocks. There’s no compound interest paid on bonds, but a stockthat goes up say, 2% per annum piles growth on the growth in formeryears, and dividends that the smart retiree will re-invest in morestock, etc., etc. The opponents to personal accounts seem to know just enough economicsto lie about it, but not enough to realize they are lying! UNLESS, OF COURSE, THEIR LIES ARE DELIBERATE! To wind this up I’ll repeat what I’ve reported previously. When SSI was inaugurated by that great humanitarian, Franklin DelanoRoosevelt, retirement payments began at age 65. That was recentlyincreased to 67. But none of these people hollering about “the Roosevelt tradition”seem to recall that in 1935 the average US male life expectancy was 58years!!! So those great friends of the little guy knew that most of us woulddie before we could collect even one check, much less hang around longenough to get back anywhere near what we had paid in, even with nointerest at all !!! The dirty trick we played on those damn Democrat politicians was tolive too long.Bill Haynes )
If this extra point is worth diverting some of your Social Securitynest egg into common stocks, remember that you don’t get rewardedwithout taking on risk.
There’s no such thing as a free lunch.
Dr. Irwin Kellner is chief economist for MarketWatch. He also is theWeller professor of economics at Hofstra University (Bill says:JUST THINK ABOUT ALL THE POOR PEOPLE WHO LEARN THEIR ECONOMICS FROM THIS GUY!!) andchief economist for North Fork Bank (FDIC: CHECK THEIR BOOKS !) .
Bill
Wm E HaynesAerospace Systems Analyst