Houston Chronicle: Personal Retirement Accounts Are a Winner

August 12, 2002

An August 4th opinion piece in the Houston Chronicle argues for the long-term strength of the American market and its ability to bring workers through the Social Security crisis. James R. Thompson and Edward E. Williams of Rice University argue that recent market downturns should not impede reform. Excerpts follow:

"The critics are wrong. The Bush plan is a win for younger workers. It is also a win for those persons retired or nearing retirement who already have investments in securities. And it is a win for the economy of the United States."

"President Bush has suggested that a worker might elect to use a portion of his or her FICA set-asides to invest in the stock market. We will use, as an example, an annual contribution of $ 2,000 for each worker over a period of 45 years. We will invest the money in the Ibbotson Index of large-cap stocks (which closely tracks other large-cap indices). We have Ibbotson data starting with 1926 and going forward 75 years. Using both classical parametric models and a nonparametric procedure that we have developed (both procedures give similar answers), we have computed the risk profile of a worker having such a plan.

"There really is no good financial argument for not giving younger Americans the option to put some of their FICA assets into bonds or securities. Markets fluctuate, but over a long investment period, risks are dramatically lowered. In the short run, returns may be negative. For the long haul, however, a large-cap index fund (or a total market fund) has historically worked like a certificate of deposit growing at a rate of over 10 percent per year.

"There are no miracles in investing. There are, however, two mighty weapons available to the individual investor: diversification and time. The first protects the investor against the collapse of a single stock, such as Enron. The second protects the investor against volatility in the market. The Bush plan provides Americans the advantages of both.

"People who do not trust the American free market as an engine for retirement plans should ask themselves just where they think money comes from in the first place."

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