NCPA - National Center for Policy Analysis

Stock Market Returns Outweigh Risk

May 15, 2000

Last week, Al Gore attacked George W. Bush's plan to allow younger workers to divert a small portion of their payroll taxes into private accounts. These funds could be invested in the stock market, giving workers a higher return than they can ever hope to get from Social Security. Gore argued that allowing workers to invest in the stock market is too risky because the market could turn down, endangering workers' retirement.

It is true that Social Security's return is more or less guaranteed, whereas there is no certainty the stock market will continue rising. To be sure, the market takes sharp downturns from time to time. But for the most part, those investors who have taken the long-term view and invested in a balanced portfolio of stocks have been richly rewarded.

  • Looking at every 20 year period over the postwar era, the worst an investor would have done is get a 7.1 percent annual rate of return (1957-77 and 1959-79). 
  • The best 20 year period gave them a 17.9 percent annual return (1979-99).
  • On average, over a 20 year span, investors in stocks have achieved an 11.1 percent annual return since World War II. The median return was 10.65 percent.
  • By contrast, Social Security's return for future retirees will be 1 percent to 2 percent.

According to a Gallup Poll in March, 61 percent of families now own stock, either directly or indirectly through mutual funds. Most of workers are covered by defined-contribution pension plans. That is why a CNN/Gallup/USA Today Poll in January found 62 percent of Americans favoring something like the Bush plan for Social Security, and only 33 percent opposed.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 15, 2000.

 

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