George W. Bush has embraced the idea of allowing people to use some of the money in their Social Security accounts to buy stocks. President Clinton, in his 1999 State of the Union speech, suggested putting upwards of a trillion dollars of Social Security money into the markets. Al Gore, the cunningly constructed robot whose loudspeaker has been hard-wired too high, says he’s against the idea, but you may be confident that, after this election, there will be a bipartisan effort to make some kind of scheme for putting Social Security money in the market a reality.
While the details of the Democratic and Republican proposals are fuzzy, the main difference between them appears to be that the Republicans want each person to have a separate account and make his own investment decisions, while the Democrats lean toward having the government buy the securities en bloc and then distribute them in people’s individual accounts. Either way, I don’t have the slightest doubt that the big brokerage houses will get a commission on every share bought or sold. This is in and of itself highly desirable, because the one segment of our nation that has lagged behind the current prosperity is the securities industry. Thank goodness that, at long last, Wall Street will receive some compensation for its good work.
Other than the enrichment of under-the- poverty-line stockbrokers living on food stamps, there is absolutely nothing to be said in favor of either scheme. Both are freighted with political, economic and personal dangers, although the underlying premise is being peddled by leaders in either party as a fail-safe, everybody-gets-rich plan that only knuckleheads, octogenarian New Dealers and troublemaking contrarians could be against.
The Social Security scheme is based on the same bit of dogma by which millions already have been imprudently enticed into the market. This is the assertion that if you invest for the “long term” you can’t lose; the corollary is that it’s only the in-and-outers, day traders and flighty speculators who do lose. But the actual historical record doesn’t support this proposition. Simply put, it’s not axiomatically true that you can’t lose if you invest for the long haul. Long or short, you can.
The historical facts about the market are well set out in a new book entitled Irrational Exuberance (Princeton University Press), by Robert J. Shiller, a professor of economics at Yale University. His book, although perhaps a grain or so too difficult for a modern college graduate, is plainly written for non-economists and worth the effort. Prof. Shiller identifies three major bull markets in the 20th century prior to the one we’re living through, those that peaked in 1901, 1929 and 1966. Shiller writes that “in each of the twenty-year periods following these peaks, the stock market has done badly in real (inflation corrected) terms. The (geometric) average real return on the S&P Composite Index was 0.2% a year from June 1901 to June 1921, 0.4% a year from September 1929 to September 1949, and 1.9% a year from January 1966 to January 1986.” Hence, anyone buying at the top of a market can, if history repeats itself, expect to wait a generation or more before he recoups his losses and does significantly better than break even. As the good professor points out, the people who do well in the market, by and large, are those investors lucky enough to buy after the market has passed through a peak and lost much of its value. And luck it is, because no one knows how to determine when a market will bottom-or even if it has bottomed-until some time after the fact, when the information will not be of too much value.
Since when you invest seems to be as important as what you invest in, we could conceivably have successive age cohorts of Social Security pensioners who are alternately living well or living poorly, depending on when they happened to come into the labor force. Luck plays such a large role in this. The market is a crap shoot: If you don’t believe it, look at George Soros and some of those other guys who’ve lost billions in the last year or so-although before their reverses were made public, these men were accorded an infallibility not conferred on John XXIII. You don’t gamble with pension money, least of all bedrock pension, which is what Social Security is supposed to be. If Social Security money is to be invested in any kind of financial instrument, Prof. Shiller makes the sensible suggestion of putting it in inflation-proof government savings bonds, which pay 4 percent-a sum that turns out to be more than you might have made in the stock market had you been unfortunate enough to have invested during its various down phases.
I can’t help but speculate that, the billions in commissions aside, there may be another motive for trying to get some of those Social Security trillions into the market. We are a nation that has been putting no money aside for some years now except what we invest in the market. Once upon a time, extra money was sunk into bank savings accounts; now it’s in the market, so that a crash would all but wipe out the American middle class. What the political and social consequences of such a financial catastrophe would be are unknowable, except that they will be large-just as large as they were 67 years ago when the banks did their folderol, decimating the middle class and bringing in the New Deal.
Today we’re told that when the market goes down it’s a “buying opportunity,” and the people who say that are correct-but it’s not the kind of buying opportunity you necessarily want to take advantage of. In this regard, Prof. Shiller points out that, after each of the last century’s famous crashes or panics, the market recovered (or all but recovered). Then, in the weeks and months that followed, it slowly, undramatically expired. Week after week, it went down a little at a time.
Patterns of that kind make it difficult to decide when to intervene to prop up the market. Then there is the question of how. In a crisis situation, it’s practical for the Federal Reserve chairman to call up the major brokerage houses and tell them to buy and buy and buy while the Fed supplies the money. That’s fine for a two- or three-day crisis; but if there’s an undertow of people and institutions sneaking out of the market week after week, the crisis expedient won’t work. It would amount to an out-and-out baldfaced government takeover of the securities industry.
Diverting Social Security money into the market might serve to keep prices up or even advance them. In the near term (which is as far ahead as C.E.O.’s or elected officials calculate), the scheme might work if the withdrawals out of the market weren’t so large and so continuous that even a massive infusion of Social Security funds still wouldn’t be enough to steady the price levels.
Assuming the stream of new Social Security investment was enough to hold prices up, however, another problem would soon pop its head above ground. At current price levels, stocks are paying just a little more than 1 percent in dividends-far less than Social Security money is getting now where it is, in the form of government IOU’s. For the stock market to be a better place to invest retirement money, shares must pay larger dividends or the price of shares must go up.
If the Social Security money drives the price of shares up, what happens when people want to retire? The dividends are too small to live on, so the shares must be sold for the retirees to realize some cash income. But, but, but-there are so many problems with this scheme! If the shares are sold, the market will drop; and it could drop so fast that the Social Security pensioners will get hit by significant losses.
A final thought on this subject. What securities will the Social Security money be invested in? In the last couple of years, we’ve seen a market swamped with money, much of which has gone into worthless, profitless and hopeless companies. A certain amount of such losses are unavoidable and necessary, because there is no other known way to distinguish the winners from the losers except to give them all a little bit of money and see what happens. But there comes a point when worthless projects are being talked up and the money is being thrown around as if there was no end of the stuff-which there won’t be once Wall Street gets its mitts on the great mother lode of capital, the Social Security system.
The communists came to grief by investing fortunes in money-losing, inefficient enterprises. Their misallocation of capital was symbolized by the Gdansk shipyard in Poland employing tens of thousands of workers, most of whom weren’t needed and couldn’t be let go. In the United States, if we continue to spew investment money with all the precision and thought of a whirling lawn sprinkler, we shall soon have our own capitalist version of that meltdown. Pouring a trillion dollars of Social Security money into this market will take us quite a way down the road to Gdansk.
The stock market dilemma is quite bad enough without compounding it by imperiling even more of our shaky retirement systems. Find another way to make extra commissions, guys.