All through the just-ended campaign season, Democrat attacks on personal accounts for Social Security were blunted country-wide by brave Republicans. But so far in the battle against the anti-personal-account demagogues, a key point has been overlooked: Average, working-stiff, Main Street, red-state Americans can manage their own money better than the government can.
Look, for example, at the stock-market plunge of the last three years. On balance, the broad-based S&P 500 has been down 30 percent, adding fuel to liberal attacks on personal accounts. Who in their right mind, the Democrats ask, would want to buy into such a catastrophic system? Well, one strong but seldom-heard response is that not everyone owns stocks. And non-stock investing did quite well in the last few years, believe it or not.
Treasury notes and bonds increased 32 percent since the market began heading south in 2000. Corporate bonds rose 27 percent in this period. Those in cash-safe money-market funds witnessed 15 percent gains. And those who bought ordinary bank savings accounts — government-guaranteed and backed by the Federal Deposit Insurance Corporation — watched their assets grow 15 to 20 percent.
Home owners also did well in this period. Today, 70 percent of American families own homes, compared with 50 percent who own stocks. Home prices have increased 5 percent a year on average during the down period on Wall Street, while mortgage rates have dropped significantly. So, if you owned Enron, you’ve been a very angry investor. But if you owned your own home, and refinanced it two or three times since 2000, and invested your surplus balances in Treasury notes and money-market funds, at least you broke even and in some cases you came out ahead.
So, there are a lot of Americans who made good money in recent years by not investing in stocks. But this fall, you probably didn’t hear Tom Daschle or Jon Corzine or Paul Krugman ever acknowledge that a number of financial securities gained in value while the stock market dropped. Their enthusiasm for discrediting the stock market blocked them from recognizing the fundamental benefits of choice in investing. And choice, coupled with balance, is how Social Security reform should be sold.
Personal-account opponents also never tell you that members of Congress enjoy the exact kind of investment choices that are today denied ordinary working stiffs. The Thrift Savings Plan, available to all congressional members and their staffs, features a range of personal-account-type choices. Maybe that’s why Sen. Daschle didn’t seem so sad after losing his majority-leader status on Election Day. If he’s the conservative investor he would have us believe, his retirement money is tucked neatly away in appreciating bond funds in the Thrift Savings Plan. How hypocritical is this?
At the end of the day, however, stocks are the best way to create personal wealth over the long run. More than 90 percent of the time, according to University of Pennsylvania professor Jeremy Siegel, stocks outperform inflation, T-bills, and bonds when held for 20 years or longer. Even if you include this wretched three-year stock period, inflation-adjusted stock returns over the past 20 years have averaged 11.5 percent annually, while Treasury bills rose less than 3 percent and Treasury bonds just over 9 percent. Ultimately, when constructing his or her personal-account portfolio, the younger worker will compare all these gains with the measly 1 to 2 percent return now being generated by choice-less Social Security.
Of a number of promising pro-growth tax-cut options being discussed today in Washington, in some sense the most significant would be personal-accounts for Social Security, a reform that’s high on the Bush administration’s agenda. There isn’t an economist out there who doesn’t agree that the nation needs more private saving and investment to spur productivity, real incomes, jobs, technology advances, and overall economic growth. By transferring all or part of the 6.2 percent payroll tax into private savings vehicles, that portion not given back to Treasury bills and notes will be invested in private-sector growth.
Harvard economist Martin Feldstein estimates that personal accounts will deliver a 5 percent permanent increase in the gross domestic product, accumulating to a roughly $12 trillion future gain at present value. By converting lower-return benefits into higher-return investments, personal accounts will mean a whole lot more to wage earners than one-time tax rebates or the other goofy plans heard on the campaign trail.
Does anyone seriously doubt that private wealth creation, driven by individual choice and ownership, won’t solve the vast majority of our economic problems? No wonder pro-Social Security reform politicians did well in the recent election.