Social Security and Stock Market Risk
January 16, 2003
The major Social Security reform plans would allow younger workers to put some of their payroll taxes in personal accounts that would be invested in stocks and bonds. The accounts earn a compounded rate of return over the worker's life and supply a portion of his retirement benefit.
While the market is volatile on a daily or annual basis, over longer periods the market trends upward. A worker saving for retirement will typically invest for more than 35 years. Using data from the Center for Research in Security Prices at the University of Chicago, we can calculate the return on $1 invested each month plus reinvested earnings for any 35-year period:
- The average annual real rate of return over each of the 35-year periods ending between 1961 and 2002 was 7.3 percent after inflation. (See Figure I.)
- The lowest earning 35-year period, which ended in 1982, gained an average of 3.6 percent per year.
- There were positive gains in every 35-year period and each outperformed what Social Security will pay in return for workers' payroll taxes.
Over the lowest-earning 35-year period in history, the market's average annual rate of return was 2.7 percent per year. Even workers retiring in a year equal to this worst-of-times scenario would receive benefits greater than the current Social Security system can afford to pay them.
Source: Matt Moore, "Social Security and Stock Market Risk," Brief Analysis No. 429, January 16, 2003, National Center for Policy Analysis.
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