May 29, 2001
President Bush's proposal to have religious organizations more deeply involved in providing government social services has raised serious questions about the separation of church and state. Many people question whether religious groups should be so closely linked to the government. However, few people have examined the extent to which religious faith is tied to President Bush's plan to privatize Social Security. This matter deserves the public's attention.
Faith, religious or otherwise, lies at the very center of President Bush's proposal to privatize Social Security. The President has argued that high returns in the stock market will allow workers to get much larger retirement benefits if their money is invested in stocks through individual accounts, instead of being paid into the existing Social Security system.
Faith is central in this story, because the only way it could possibly be true is if stocks provide a substantially better return, in the future, than the government bonds that the Social Security fund currently buys with its money. The belief that stocks will provide a substantially better return in the future than government bonds is entirely a matter of faith. No one who supports privatization has ever constructed a set of projections for stock returns that shows how this could be possible.
This is an important point to understand. The only reason that anyone believes that the Social Security system faces a problem is that the Social Security trustees project that it will face a shortfall in the years after 2038. At present, and for the near future, the program is running huge surpluses. But because of these long-range projections, people see a problem in the distant future.
While the trustees make very detailed projections of economic growth, life expectancy, birth rates, and everything else that can affect the finances of Social Security, they have never constructed projections for the components of stock returns (dividends and capital gains). Nor have any of the economists who support privatizing Social Security done so. There has been only one set of projections for stock returns that was actually derived from the projections for economic and profit growth in the Social Security trustees' report. This projection showed that annual stock returns will average just half a percentage point higher than the return projected from government bonds, over the system's seventy-five year planning horizon. This difference would not even be enough to cover the administrative costs of individual accounts.
The proponents of privatizing Social Security argue that returns in the stock market will be far higher than returns from government bonds, based on the history of the last sixty or seventy years. And it is true that over the this period stock returns have, on average, far exceeded returns on government bonds -- a difference of approximately 4 percentage points a year.
But the economy grew at twice the rate in the last seventy years as the Social Security trustees expect that it will grow in the next seventy. The dividend yield on stocks was also twice as much on average over the last seventy years as it is now. These are the reasons that stocks are projected to give much lower returns in the future than in the past.
For the economists and actuaries in this debate, it should be quite simple to derive stock return projections from the other projections in the Social Security trustees' report. If the proponents of privatizing Social Security could produce a set of projections that support their claims about stock returns, then the rest of the professionals in this debate could evaluate their projections and see if they make sense. That is the way that economics is supposed to work.
However, the privatizers refuse to put their numbers down on paper. They keep repeating their mantras about high returns in the stock market, but won't take the half hour needed to show us how such returns are possible. Apparently, the privatizers don't think that the public has a right to see the numbers. They think they we should just take their word for it. In short, they want privatization to be a faith-based initiative.