[Mb-civic] No Market Magic for Aging U.S. James Flanigan
michael at michaelbutler.com
Sun Sep 5 14:10:37 PDT 2004
No Market Magic for Aging U.S.
September 5, 2004
"Ownership," President Bush declared in his acceptance speech Thursday
night, "brings security and dignity and independence."
At best, the president was two-thirds right.
Dignity and independence, maybe. Security, definitely not. As anybody who
owns anything will tell you, the risk of losing it all is part and parcel of
What Bush is proposing is particularly dicey. His idea is to help
accommodate future waves of baby boomer retirees by allowing younger workers
to take some of the money they now pay in Social Security and Medicare taxes
and instead stick it into personal accounts that are invested in stocks and
bonds. He didn't give specific figures, but administration staffers have
mentioned allowing 2% of payroll taxes to be diverted into securities.
That could add up fast. The total paid into Social Security last year was
$543 billion. If 2% was diverted to personal accounts, it could mean as much
as $11 billion in new investments annually.
The trouble is with the underlying assumption that the stock market will
magically finance an abundant retirement. Such thinking is seriously out of
Indeed, Roger Ibbotson, who pioneered the study of long-term returns in
stocks and bonds, believes that the market is likely to perform much more
poorly during the next 10 to 25 years than it has in the last three-quarters
of a century.
From 1926 through 2003, according to his firm Ibbotson Associates, stocks
enjoyed an average annual yield of 10.4%. But Ibbotson expects returns to
trend lower, for the simple reason that companies have been overvalued in
recent years, given their level of profits.
Ibbotson is convinced that the pattern in which the average stock's price
has soared from 10 times earnings to 25 times earnings, as it has over the
last decade, won't be repeated.
"I don't say today's P/E ratio will go down," says Ibbotson, who also is a
professor at the Yale School of Management, "only that we won't see such a
Beyond these market fundamentals lie incredible demographic pressures.
In 1950, there were 7.3 active workers for every person over age 65. Today,
there are 3.3 workers for every retiree. And within this decade, the number
will fall to fewer than three workers.
Confronted with this trend, asset funds will quickly find themselves forced
to pay out more money than they are taking in.
To do so, investment managers Robert Arnott and Anne Casscells point out,
funds will have to sell off pieces of their giant stock portfolios to "a
proportionately smaller roster of potential buyers" namely, workers and
their pension plans. That, in turn, will put downward pressure on stock
prices, the two write in a paper titled "Demographics and Capital Market
The bottom line: Many investment experts foresee returns on stock market
investments settling around 6% a year over the next decade.
And an average, remember, is just that a generalized picture of what's
happening over a certain period. Within this time frame, of course, can be
years of relatively meager results.
It's a little like playing musical chairs. Depending on when the music
stops, you may or may not find yourself in a comfortable spot.
Recently, for example, the stock market has not been kind to workers
counting on their 401(k) plans to get them through their golden years. The
reason: They "have not recovered from the impact of the bear market," the
Employee Benefit Research Institute, a Washington-based industry group, says
in a new report. Workers in their 60s, who have been saving for 30 years,
"were still down 15.5% between year-end 1999 and the end of 2003," the
Stanford University economist John Shoven, who has advised Republican
administrations on tax and retirement policy in the past, is not an advisor
to Bush or an admirer of his plan. Neither, though, is he much impressed
with Democratic candidate John F. Kerry's stance that he will not touch
The program, Shoven believes, must be overhauled to deal with the 75
million or so baby boomers set to start retiring at the end of the decade
or else Social Security will find its coffers drained.
But, as Shoven stresses, there are only two ways to truly reform Social
Security. One is to increase the taxes that workers pay into the system. The
other is to reduce the benefits that Social Security pays out.
Neither Bush's nor Kerry's proposals recognize this reality. Bush, by
stating that he will not raise Social Security taxes but will foster an
"ownership society," is looking for the equivalent of a free lunch. Kerry,
by vowing not to trim benefits, is condemning Social Security to a long-term
state of crisis.
Shoven, who directs the Stanford Institute for Economic Policy Research,
proposes a plan that would balance the guaranteed benefit of Social Security
with the risk of an investment account. He would compel employees to pay an
additional 2.5% in payroll taxes into an account that the Social Security
program would augment with a comparable contribution, making for an
investment fund of 5% of an employee's wages.
To raise the government's share, Shoven would reduce the guaranteed benefit
for all recipients to $600 a month from the current average of $800. No
exceptions. "Bill Gates would get $600 and the company receptionist would
get $600," Shoven says.
That professorial proposal is only one sensible suggestion to stave off a
disaster. Many more good ideas will surely emerge as the population ages
just not, it seems, from George Bush or John Kerry.
James Flanigan can be reached at jim.flanigan at latimes.com. For previous
columns, go to latimes.com/flanigan.
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