- The Washington Times - Thursday, April 27, 2000

Privatization of the Social Security system can make you a wealthy retiree. Yes, you say. But what about the risk? "Not to worry" say economist Kevin Hassett and financial columnist Jim Glassman in their book, "Dow 36,000." Their theme is that the Dow Jones Industrial Average of stocks (even at 10,000) remains a good and safe investment. Amazingly, some politicians still don't get it. They want you full of fear don't be. Here is why.

In 1982 the Dow was at 777. In December 1996, when it hit 6,400, Federal Reserve Chairman Allan Greenspan called the Dow "irrationally exuberant." In the spring of 1998 with the Dow at 8,700 even more luminaries of the financial establishment preached disaster. They pointed to sky-high price-earnings ratios and low dividend yields. They assured us that the bubble would pop. Two years later the market is over 10,000. Could it be that the model Wall Street has been using to assess whether stocks are overvalued (a model based on historic P/E ratios) is flawed? Messrs. Glassman and Hassett think so.

They cite research by Jeremy Siegel at the University of Pennsylvania which concluded that over a 20-year period stocks are no more risky than Treasury bonds, but that stocks have done far better. During the worst 20-year bond period in the 20th century, bonds went down 3 percent per year; in the same period stocks annually rose 1 percent. Over the past 75 years large company stocks have been producing average annual returns of 11 percent, while long-term Treasury bonds have returned 5.2 percent.

Economists have pondered why this should be so. Their best answer is that investors traditionally were more fearful of the volatility of stocks, and therefore demanded an extra return to compensate for what they saw as a greater risk. What has happened in the 1980s and 1990s is that investors have become calmer and smarter. They are requiring a smaller risk premium. That premium, to invest in stocks rather than bonds, which in modern history has averaged about 7 percent, is now down to about 3 percent. Mr. Glassman and Mr. Hassett believe it is headed close to zero and that is the true explanation for the ascension of stocks in the 1982-2000 period. Why do investors see stocks as less risky? First, they are better educated and have experience from mutual funds in riding out dips. For example, in the summer of 1998, when the Russian devaluation hit and the market declined 19 percent, investors redeemed only .3 percent of their stock fund holdings.

Second, increased numbers of media outlets have stimulated new investors.

Third, retirement plans such as 401(k)s, IRAs and Roth IRAs, allow keeping stocks in tax-deferred retirement accounts, which promote long-term holding.

Fourth, with global pressure businesses have restructured and become more efficient.

Fifth, believe it or not, government monetary and fiscal management has actually gotten better.

Sixth, the regulatory and tax environment has been improving. Finally, the Cold War threat appears to have diminished, at least for the short-term. Although 50 percent of Americans now own stocks, up from 4 percent in the 1950s, some politicians think that Americans are so dumb that they cannot even choose sensibly for themselves where to invest their own earned Social Security money. So there is no investment of your hard-earned dollars not even bonds. Social Security today is a Ponzi scheme a revolving fund where today's workers have to pay today's retirees. As the number of retirees grows and retirees live longer, and the number of workers decline (when Baby Boomers retire), the current system, without investment, will fail.

Too many politicians won't face, or won't tell you, this simple truth. An exception was Steve Forbes. In the 1996 campaign he proposed that a fraction of the Social Security taxes you pay be invested where you want it. Three or four choices would be presented to you. For example, a mutual fund, a bond fund or staying with the current system. You decide.

But no one in power was willing to touch the idea. The banner of fear won.

The result: four years of lost compounding and market increases with Baby Boomer retirements looming even closer. In election 2000, this ought to be a hot topic of debate. Will any politician be brave and knowledgeable enough to explain these facts and propose a 21st century investment solution? A simple change letting you invest your hard-earned Social Security money during your working years could make you a wealthy retired American. Whoever proposes it deserves your vote.

Deecy Gray is a journalist and board member of the Foundation for Research on Economics and the Environment.

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