NCPA - National Center for Policy Analysis


January 19, 2005

Some suggest private savings accounts will subject American's retirement funds to unconscionable risk. In fact, a system of private accounts can be established that will conform to widely accepted investment principles, minimize risk and allow millions of Americans with few, if any, financial assets to build real wealth, says author Burton Malkiel.

There is no reason why private accounts should not provide better returns than traditional Social Security, says Malkiel:

  • From 1926 to 2004, the stock market has provided an average annual return of just over 10 percent.
  • The worst return for a 25-year investor starting in 1929 was about 6 percent, while that of the 35-year investor was about 8 percent.
  • The rate of return afforded by Social Security is about 1 to 2 percent.

Malkiel says private accounts should have risk-minimizing elements such as limiting availability to workers at least 25 years old, restricting the choice of investments to a few simple mixes of funds balanced between stocks and bonds and requiring low-cost index funds.

He also points out that automatic rebalancing should be required, so that as people age and their investment horizons shorten, portfolios will be adjusted to contain fewer common stocks.

Source: Burton G. Malkiel, "'Social Insecurity'... Hardly." Wall Street Journal, January 17, 2004.

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