Kevin Drum presented some data a few days ago which I believe bears strongly on this issue.

"The Social Security trustees project that the economy will grow at a plodding rate of 2% a year over the long term. Nevertheless, President Bush projects that stock returns in private accounts will average a stellar 6.5% a year over the long term. Can both these things really be true?

Bloomberg surveyed 58 economists recently, and and 39 said no. And there's also this:

If that's really true, it's pretty stunning. It stands to reason that stock market gains are correlated to economic growth, but nothing in the real world gets a correlation coefficient that high. If it's true, it means that economic growth explains 85% of the variance in stock prices. That doesn't leave much room for anything else, and it sure as hell means that lower economic growth in the future is almost certain to generate lower stock price growth as well. That's bad news for anyone who thinks that investing in private accounts will produce a miraculous windfall."

Oh yeah, and I forgot to say:

"Party on Party people let me hear some noise,
DC in the house jump jump for joy
There's a party over here
A party over there
Wave your hands in the air
shake your derriere
these three words when you're gettin' busy
whoomp, there it is, hit me"

That's bad news for anyone who thinks that investing in private accounts will produce a miraculous windfall.

But it's not bad news, as this post explains. Even if economic growth is as small as the most negative forecasters predict, Social Security reforms will still yield on average higher gains than the status quo; they must only beat a 3% return. (Of course, if the government weren't involved at all, the windfall would be even larger.)

The issue then becomes one of whether or not you choose to trust the 1 Goldman Sachs estimate for economic growth which you cite or the Bloomberg survey of 58 economists. If you choose to follow the particular estimate that you cite, then yes, one would expect the stock market to grow at 5%, roughly the same as the GDP growth.

However, if growth falls of to anything below those levels, a possibility suggested by the Bloomberg survey, then it becomes increasingly unlikely that people will be able to beat the 3% taken back by Social Security.

Another paper, again cited by Drum, came out a few weeks ago discussing that part of the issue; what the odds are that you'll be able to beat the 3%. Using the historical rates which you cite, the paper found that 32% of investees would have fallen short of the 3% claw back level over the last 75 years and would have therefore lost money. In addition, the median rate of return would have been about 3.4%.

But, in the next 75 years, due to the fact that GDP growth is expected to be chewed up in part by population growth, the general assumtion (and one used by the Social Security Trustees to argue that the program is faulty) is that the GDP will not grow as fast as it has over the past 75 years. Using the assumption that our growth rate will match the growth rate of international markets over recent times (read the paper to find out why the author makes that assumption) the paper suggests that 71% of folks in the program would actually lose money compared to Social Security, and the median rate of return would be 2.6%.

Whoomp, shaka-laka-shaka-laka-shaka-laka

I do not doubt that some investers will not be able to beat 3% in the stock market. "Risk" is an inherent part of any market. But 1) you do not have to opt for personalized accounts; it's a choice, and 2) you do not even have to opt for the stock market; you can always choose more safe options, such as bonds. That some people win and some people lose in the stock market should come as no surprise. You won't find me arguing that stocks are the golden goose for everyone. But I am arguing people should have the choice, if they want, to invest in whatever they deem best. Do you not agree people should have that choice?

Do you not agree people should have that choice?

Maybe not, as I cannot imagine a system that will not have some sort of safety net for those that fail to make good choices.

But, Foltz, there's still a "safety net" in the plan Bush has presented. You can only exercise choice with a portion of your OASDI contributions, your choice is limited to a set of funds selected by the government, and that set will get more conservative as you get older. No one is going to be able to invest in something like the dot-coms of the late 90's.

It would appear that "failing to make good choices" may mean retiring in Des Moines rather than Daytona Beach. (Unless someone is relying *only* on Social Security for their retirement, which is really foolish no matter what.)

Eric, it may be foolish, but that doesn't mean that there aren't people out there who have no choice but to do so.

If you spend your entire life working low-wage jobs, the kind of which are rapidly becoming more prevalent in this economy (wal-mart, etc.) then you have a choice between eating and saving for your retirement. I have that choice right now; I'd love to put money into a retirement account, but right now I'd have to choose between doing that and having dinner. And given those 2 options, there is no choice. Hopefully I'll be able to correct that once I actually complete a Ph.D., but for now that's the situation I'm in.

Let's also keep in mind a couple other points. First of all, Eric outlines how managed these funds would have to be. Putting aside how complicated of a system taht would necessarily be, it's also important to keep in mind that the less choice there is in the system, and the more managed the system is, the fewer people there will be who are able to beat the system. The more managed it is, the less freedom you would have to invest, and the fewer people there would be who would be able to beat the claw-back number.

And secondly...it seems like it is folly to say to me that I'll have the option of just staying with Social Security and have nothing bad happen to me if that is the choice I make. Why? Because in order to finance the transition over to that system, the money to pay the people who are currently receiving social security would have to come from somewhere. It would either have to come from cuts in overall benefits, which would hurt me, or it would have to come from massive increases in the national debt, which would hurt me, or it would have to come from increasing taxes, which would hurt me. In other words, no matter what happens, if the transition takes place over to private accounts, as a person who likes a safety net just in case, I would be hurt in all cases.

On the other hand, if we don't decide to privatize the system, the system would remain either solvent or nearly solvent for basically all my life, and whatever extra dollars are needed for solvency could be made up by either a small increase in the retirement age (66 or 67), a small increase in the tax rate, or (my favorite) an increase on the cap of income which is eligible for Social Security taxes (something which has not happened in over 5 years, one of the longest stretches without such an increase since the program was created).

Eric, it may be foolish, but that doesn't mean that there aren't people out there who have no choice but to do so.

I understand that*, but I was pointing out that regardless of what choices those people make (if they are given any), they will face challenges in retirement.

could be made up by either a small increase in the retirement age (66 or 67), a small increase in the tax rate

Both of these, of course, essentially mean increasing the burden on today's workers to finance Baby Boomers' retirement (i.e. we're getting screwed by our parents). How is this different from the criticisms of switching to personal accounts? Granted, personal accounts may require a greater investment to finance current retirees, but then the question of Social security solvency goes away *forever*.

an increase on the cap of income which is eligible for Social Security taxes

This is another tax hike, of course. Plus, isn't there a cap on Social Security benefits? Is it fair to increase the cap of income that is taxed for OASDI without increasing the cap on the amount of benefits higher-income workers can qualify for?

*Although virtually everyone can find at least a little in their budget to save for retirement if they make it a priority. If someone says they don't have any money to save but they have cable TV, broadband internet access, go out for meals and entertainment, etc., in reality they are choosing those things over saving for retirement.

BTW, Balta, I dispute that the sort of personal account plan with managed options would be as complicated as you imply. As I understand, such a plan already exists, and it is how federal workers already finance their retirement.

Joshua, isn't that supposed to be a 3% *real* rate of return, as in after inflation? Also the other problem with your post is that nowhere does it mention that the rate of return on the kind of mix of stocks and bonds that the rumored Bush plan would be even lower than the ones you are speculating on?

As far as the voluntary aspect of this program, how voluntary is it really in light of the benefit cuts that will be necessary to help fund the carve out that private accounts will necessitate? How many people will in effect feel that they are forced to take the chance and keep their fingers crossed for a higher rate of return when they keep those cuts in mind?

And something else I forgot to mention is that one reason that so many are questioning the future rate of return on stocks given the economic growth rate that the Bush administration is using to justify their plans is the current P/E ratios combined with lower predicted economic growth.