CEPR Challenges Privatization Advocates on Projected Stock Returns

December 1999

Many of the parties who wish to "save" Social Security advocate investing part of the system's revenue in the stock market -- either via the federal government directly (President Clinton's plan) or individual retirement accounts (many congressional Republicans and some Democrats). These plans generally assume that stock investments will receive annual returns of 7%, the average return on stocks over the past seventy-five years.

Leaving aside the question of whether Social Security needs to be "saved" in the first place (for more on this subject, see What Everyone Should Know About Social Security), it is highly doubtful that such returns could be achieved. In their 1998 Report, the Trustees of the Social Security System project that over the next seventy-five years the U.S. economy will grow at an annual rate of 1.4%, less than half the rate of growth of the past seventy-five years. For stocks to provide returns of 7% under such conditions, the average price-to-earnings ratio -- already at 30 to 1, more than twice the historic average -- would have to rise eventually to incredible levels of over 400 to 1.

Of course, it is possible that the economy will grow more quickly than the Trustees predict, making 7% stock returns more plausible. But if that were to occur, there would be little or no shortfall in Social Security revenues to begin with.

Therefore, CEPR Senior Research Fellow Dean Baker and CEPR Research Director Mark Weisbrot have written to members of Congress who advocate Social Security privatization, challenging them to provide detailed projections -- including a break down of the return on stocks into its capital gain and dividend components -- demonstrating how 7% stock returns could be possible. Copies of the letter were also sent to prominent economists who favor privatization.

To date, the only politician to respond is Senator Judd Gregg (R-N.H.), the Majority Chief Deputy Whip. After an extended, sometimes contentious exchange with CEPR, Senator Gregg has acknowledged that he is unable to provide such projections, but has offered to forward a request for them to the Social Security Administration.

CEPR has also received a reponse from Martin Feldstein, George F. Baker Professor of Economics at Harvard, President of the National Bureau of Economic Research, Chairman of the Council of Economic Advisors during the Reagan Administration, and a well-known advocate of privatization. Professor Feldstein wrote that "as a matter of basic economics," Dean Baker and Mark Weisbrot are "simply wrong." However, Professor Feldstein apparently misunderstood Dr. Baker and Dr. Weisbrot's point, as they explained in a subsequent letter to him. Professor Feldstein has responded, asking what specific data Dr. Weisbrot and Dr. Baker are seeking, and Dr. Baker has written back explaining, enclosing stock return projections of his own consistent with the other projections of the Social Security Trustees.

Most recently, MIT Economics Professor Peter Diamond, one of the nation’s foremost experts on macroeconomics and public finance, has released a paper showing that the rate of return on stocks assumed in most analyses of Social Security reform plans are impossible—unless the stock market first takes a large plunge. Professor Diamond’s conclusions concur with analysis produced by Dean Baker (some of it co-authored with Mark Weisbrot) over the last three years.

CEPR's press releases, letters, and the responses from Senator Gregg, as well as the letters from and to Martin Feldstein, are available below.

January 22, 1999
CEPR's initial press release detailing the stock return challenge
CEPR's initial letter to advocates of privatization
List of Congressmen, administration officials, and prominent economists receiving the letter

January 25, 1999
Senator Judd Gregg (R-N.H.) responds to CEPR

January 28, 1999
CEPR's press release summarizing Gregg's response
CEPR's 1st letter to Senator Gregg requesting detailed return projections

February 4, 1999
Senator Gregg's 2nd letter to CEPR, stating that he will provide such projections if CEPR provides a plan to modify Social Security of its own that meets certain conditions

February 9, 1999
CEPR's press release detailing Senator Gregg's refusal to provide the projections requested
CEPR's 2nd letter to Senator Gregg, stating that "it is hard to believe that you are making our participation in this debate a condition of giving out information about the assumptions behind your proposal"

February 10, 1999
Senator Gregg's 3rd letter to CEPR, offering to forward a request for the projections to the Social Security Administration

February 22, 1999
CEPR's press release announcing Senator Gregg's offer
CEPR's 3rd letter to Senator Gregg, thanking him for his offer

February 26, 1999
Professor Martin Feldstein's letter to CEPR, stating that Dr. Baker and Dr. Weisbrot are "simply wrong."

March 3, 1999
CEPR's response to Professor Feldstein, explaining that "we have not been arguing, as you assume in your letter, about the returns to physical capital. This debate is entirely about returns to financial capital."

March 11, 1999
Professor Feldstein's second letter to CEPR, asking what specific data Dr. Weisbrot and Dr. Baker are seeking.

March 15, 1999
Dr. Baker's response to Professor Feldstein, enclosing stock return projections of his own consistent with the other projections of the Social Security Trustees.

October 4, 1999
CEPR's press release about the findings of MIT Economics Professor Peter Diamond showing that the high rate of return on stocks assumed in most analyses of Social Security reform plans are impossible—unless the stock market first takes a large plunge

Center for Economic and Policy Research
Phone: (202) 293-5380   Fax: (202) 588-1356  Home: www.cepr.net