SOCIAL SECURITY and STOCKS
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Social Security and Stocks: Safe Enough?
Retire at 80% of Final Pay--Guaranteed?

        Stock safety in social security is equal to that of Treasury bonds. This study unequivocally demonstrates the continuous equal safety of stocks (equities) compared with Treasury bonds in a social security setting. And it shows that the magnitude of earnings superiority is 60 times more than bonds in buying power on average. It does not address fiscal-legislative remedies for the present system. But these are not difficult to mandate while maintaining all present commitments.

        Stock profits can be enormous.   But so can the apparent risks.

Everyone knows that. Retired workers want guaranteed, steady income, adjusted yearly for inflation, to replace partially the wages they no longer earn. Current law provides them with this. Is there a fit between these two sets of facts?

Despite these widespread, often vigorous, prevailing opinions and the accompanying cloud of misperception and ignorance of the historical relationships with bonds and inflation, the return from equities as a class of investments since 1871 (the earliest reliable data available) have always exceeded the return from government bonds as a class by enormous margins and, more important, have never had a loss with respect to the actuarial structure of a retirement fund. Let us look at this structure which expands returns beyond expectations and reduces to inconsequentiality the probability of any loss.

Demography is Destiny

The typical individual enters the work force at the age of, let us say, 20 (some earlier, some later, but no matter), and contributions to the retirement fund commence on his behalf. Work ends upon retirement at age 60--savor the illustration! (versus the current, statutory 62 or 65, soon to be 67). Mortality occurs 20 years later at age 80. These numbers may be more precisely adjusted by actuaries, but they are exemplary for my purposes.

With this lifespan structure, the appropriate investment horizon is precisely either 40 years (the work span) or 60 years (from work entry into the system until mortality). In either case, stocks are demonstrably as safe as bonds and pay two to three times as much in investment returns at the very least. These two investment horizons are riveted into the exact time line of the wage earner's working and retired life. Other time frames for the retirement investment horizon are entirely without meaning, relevance, or utility. I will here treat comprehensively of the 40-year period. Conclusions regarding it apply a fortiori to the 60-year period.


Cumulative Wealth Indices and CPI 1871-1999
Selected 40-year Periods
Value of $1 at End of Period

Best & Worst

Trsy

Corp

Cum

Ratio

Periods

start

end

Stcks

Bnds

Bnds

Bills

CPI

St/Tb

Stocks best period

1949

1989

109.6

8.2

9.9

8.2

5.3

13.3

Stocks worst period

1880

1920

7.5

3.4

5.6

5.9

2.6

2.2

TreasuryBnds best

1958

1998

92.4

17.4

20.5

10.8

5.7

5.3

TreasuryBnds worst

1929

1969

26.7

2.5

3.5

2.2

2.2

10.6

CPI highest inflation

1940

1980

74.3

2.9

3.4

4.0

6.1

25.6

CPI lowest inflation

1871

1911

12.1

4.7

9.5

6.5

1.1

2.6

Avg All Periods

1871

1999

40.2

5.0

6.8

4.9

3.1

8.1



Stocks and Social Security:
Some Indisputable Conclusions

Four telling conclusions emerge from this summary table. First, Stocks equal bonds in safety. There are no losses (Lines 2 and 4). Second, they far exceed bonds and bills in wealth accumulation in all periods (Columns 4, 5, 6, and 7). Third, they offer substantial potential increases in benefits or reduced taxes¹/ or both. Finally, the gross demographics ratio of worker/retiree population no longer apply because each worker's entitlement is a separate account owned by the worker. Sufficient unto each worker's benefit needs are the specific assets thereof.

The table contains selected data. We must look at each yearly period to determine actual results with greater precision, and we have to consider overall increased administrative expenses (they are trivial compared with the expansion of benefits). This is done in the complete article (see below).

For the full article, sources, notes, tables, and credits, please see Social Security and Stocks Complete (big file, allow up to 40 seconds to load).

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