You really want to privatize Social Security in THIS market?

The enduring mystery about President George W. Bush’s old plan to privatize Social Security by moving contributions into individual savings accounts is how it survived two market crashes and decades of underperformance by workers’ 401(k) accounts.

Yet this idea still walks among us, like a zombie. As Bryce Covert of ThinkProgress observed Monday, it’s been hawked by several of today’s aspirants to the Republican nomination for President, including George W.’s brother Jeb, Sen. Ted Cruz (R-Tex.), Sen. Rand Paul, (R-Ky.), and Mike Huckabee and Rick Perry.

One would think no one needs more evidence to understand why privatizing Social Security is a terrible idea and well-nigh unworkable, but the recent convulsions in the stock market provide the opportunity for a refresher.

We pointed out earlier Monday that one day’s market action--or even a week’s--doesn’t tell us much about the long-term direction of stocks, but that’s true chiefly for investors in it for the long term. Retirees and near-retirees don’t always have the luxury of a distant horizon. For someone planning to retire in the next month or year, the recent pullback of 10% can have direct and serious consequences.

The privatization idea was born during the go-go years of the 1980s and ‘90s, when everyone seemed to think that the bull market would go on forever. Individual workers, it was argued, could do a lot better over a 45-year working career by putting some or all of their 12.4% payroll tax into the stock market (counting their and their employers’ contributions together) than the stodgy old Social Security Administration did by investing its surplus in Treasury bonds, its only legal investment. “This isn’t a game-show fantasy,� gushed Sam Beard, a leading promoter of Bush’s privatization plan beginning in 2001. “Whoever earns at least the minimum wage can become a millionaire in 45 years.�

This overlooked a few uncomfortable facts. One was that there was risk embedded in stocks’ superior returns over bonds--and that risk was not evenly distributed. Privatization gurus noted that over the long run, stocks produced an annualized return of about 8%, which made them a great investment for anyone with a 45-year time horizon.

What they forgot to mention was that this didn’t mean that stocks yielded 8% every year. Timing is everything. Look at successive 45-year periods, as I did for my 2005 book, “The Plot Against Social Security,� and you find huge variability. The average worker who invested $1,000 every year in the stock market starting at age 20 in 1954 would have $470,000 when he or she was ready to retire in 1998. But the worker who started just five years later, in 1959, would end up with only $234,000 at age 65--half as much--despite investing exactly the same sum over the same time span.

Market crashes could destroy a nest egg that took a lifetime to nurture. A near-retiree with, say, a half-million in stock in 2007 had just over $300,000 a year later, following a 37.22% plunge in 2008. Those who held fast managed to recover their losses, but that took five and a half years--and what about those who didn’t have the luxury of time?

Individuals are consistently the most skittish of investors; they pile into bull markets late, and pile out at the earliest sign of trouble, thus doubling down on their losses. Defined contribution plans such as 401(k)s have their virtues, including their portability from one employer to the next, but their overarching flaw is that they expose individuals to market risks that they’re often ill-equipped to shoulder.

It’s certainly true that, over the long run, stocks return more than bonds. But the best way for workers and Social Security recipients to profit from the difference is to do so via the Social Security Administration, which has a long-term outlook and therefore can ride out downturns. By pooling its investments, moreover, the program can keep its transaction costs low. Numerous proposals have been floated over the years to allow the program to invest a limited share of its revenue, perhaps 40%, in equities. Congress has never seen fit to allow it, but it could do so at any time.

The privatization alternative would result in investment fees being paid each year by millions of individuals; is there any doubt why Wall Street is universally in favor of privatization? The idea would turn the safest, most efficient retirement program in American into just another investment scheme vulnerable to every market downturn, every misguided snap decision and every promoter lurking in the weeds.

Downturns like Monday’s may not presage a long-term bear market, but there will be many more days and weeks like this in the life span of ordinary workers. They should be protected from these risks by the one program that offers them shelter, not exposed to more of them.

[Update: Economist Dean Baker of the Center for Economic and Policy Research observes that the vaunted high returns assumed for stocks by George W. Bush’s privatization campaign--an average annual return of 6.5% above inflation--would be hard to sustain given the relatively high ratio of prices to earnings in the stock market. At the time of the privatization drive the S&P’s P/E multiple was nearly 26; it’s still about 19, while the average over time has been about 15.5. Baker in 2004 challenged Bush’s team to show how their assumptions of profit growth over the subsequent 75 years could produce the returns they assumed. “The privateers,� he recalls, were “stumped.�]

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