George W’s Social Security Reform

U.S. Presidential candidate George W. Bush recently promised to make Social Security reform a centerpiece of his presidential campaign. Exactly how he intends to do so is still unclear, since he has not yet released any actual plans for reforming the system. In fact, it is quite possible that Mr. Bush will release no significant details until after the election.

But any Republican-sponsored plan is almost certain to include a privatization element. Rather than forcing working Americans to make fixed contributions into Social Security and receive a fixed level of benefits upon retirement, the reform would allow individuals to invest some of their contributions in the stock market. The final amount of their retirement benefits, of course, would depend in part on how well their stock market investments perform.

In recent years, supporters of such a plan have been able to make a strong case for privatization just by comparing the eye-popping annual returns on U.S. stocks to the “anemic” returns on Social Security. During the 1990s, the S&P 500 — a broad measure of the U.S. stock market — has produced real returns of 18% a year. By comparison, Social Security’s real rate of return is as low as 1.2% a year, as reported by the Heritage Foundation.

Given that, in 1998, the average worker paid $3,400 in Social Security retirement taxes, those rates of return have huge consequences. Over a decade, that $3,400 would have grown to $15,000 in the market, but only to $3,800 in the government’s account.

But the ride in U.S. markets has been getting much bumpier lately, and the appeal of stocks has diminished accordingly. Radical alternatives to the old-fashioned Social Security system — especially those that put people’s retirement assets at the mercy of a volatile market — are losing a lot of their allure.

After all, Social Security benefits do not change when the stock market goes up. Nor do they change when the market goes down. In essence, Social Security is a security blanket protecting against just these sorts of unpredictable changes of fortune.

Under the circumstances, this is hardly an auspicious time to put privatization of Social Security back on the table. It may, in fact, be terribly risky for Governor Bush to make Social Security a cornerstone of his campaign. And so it seems, at least to us, that, given the choppy stock market, the Republican candidate would be well advised to keep quiet about the whole business.