How Secure is Social Security?

by Michael Tanner

Michael Tanner is director of health and welfare studies at the Cato Institute.

The recent fluctuations in the stock market have given new energy to opponents of Social Security privatization. "The market is falling. The market is falling," those latter day Chicken Littles cry. "How can we trust our retirement to the risky stock market?"

But are stocks really risky? In any given year, stocks can go up, but they can also go down. For the last several years the stock market has been riding a wave of expansion. A correction was inevitable.

The year-to-year fluctuations of the market are actually irrelevant. What really counts is the long-term performance of the market over a person's entire working lifetime, in most cases 45 years. Given that long-term perspective, there is no time when the average investor would have lost money by investing in the U.S. stock market. In fact, the worst 20-year period in U.S. stock market history, including the Great Depression and the 1929 crash, produced a positive real return of more than 3 percent. The average 20-year real rate of return has been 10.5 percent.

To put all this in perspective, when Bill Clinton became president, the stock market was at approximately 3200. After the recent "crash," it sat at roughly 7600. As Sen. Robert Kerrey (D-Neb.) points out, "History shows conclusively that long-term investment in the stock market is safe and profitable."

By comparison, relying on the current Social Security system is extremely risky. Because Social Security is at its core a political system, future benefits are dependent on political decisions. Indeed, the Supreme Court ruled in the case of Nestor v. Fleming that individuals have no legal right to Social Security benefits based on the taxes they've paid. Congress and the president can change or reduce Social Security benefits any time they choose. A young worker entering the Social Security system is gambling on what a congress and president 45 years from now will decide to do.

Unless we privatize Social Security, benefit cuts or tax increases are inevitable. After all, the program is currently more than $9 trillion in debt -- that is, it owes $9 trillion more in benefits than it can afford to pay. The program will begin to run a deficit, spending more on benefits that it takes in through taxes, in just 15 years.

Moreover, even if some miraculous way could be found to pay all promised benefits without raising taxes, Social Security would still be an extremely bad investment for most young workers. In fact, according to a study by the nonpartisan Tax Foundation, most young workers will actually receive a negative return on their Social Security taxes -- they will get less in benefits than they paid in taxes. Some studies indicate that a 30-year-old two-earner couple with average income will lose as much as $173,500. One would have to be a very bad investor indeed to do worse than Social Security.

Where then lies the real risk? Is it riskier to rely on markets that have never failed to produce positive long-term results or on a politically dependent intergenerational transfer that is financially insolvent and guaranteed to lose money for most workers? Given the choice, I think I know where most young workers would rather put their money.

This article originally appeard in the Daily Press on April 24, 1998. It also appeared as a Cato Daily Commentary, Social Security: The Real Risk, September 10, 1998.