Many, if not all, of the participants in this roundtable have indicated their support for investing Social Security funds in the stock market in some form, either collectively through the trust fund, or individually through private accounts. While the Social Security Administration (SSA) has made detailed projections for wage growth, life expectancy, birth rates, and all the other variables relevant to the solvency of the program, it has never made projections for the components of stock returns, dividends and capital gains. In fact, the actuaries at SSA do not even presently have the expertise to make such projections, since stock returns have never previously been relevant to the solvency of the program.
Most people do not realize that SSA has no projections of stock returns. When SSA has analyzed plans that call for invested funds in the stock market, they have used projections of returns that have been suggested to them by others. But, the actuaries at SSA have never themselves attempted to construct a set of returns that are consistent with their other projections.
This point is very important, because the plans that call for putting Social Security funds in the stock market generally assume that the real returns in the stock market will be between 6.75-7.0 percent based on past experience. This assumption ignores the fact that current price to earnings ratios for major stock indexes are over to 30 to 1, compared to an average of less than 15 to 1 over the prior fifty years. It also ignores the fact that the Social Security Trustees project that domestic profits will grow less than 1.5 percent annually over the next seventy five years, compared to an average growth rate of more than 3.0 percent over the previous seventy five years. No economist has yet to be able to show how 6.75-7.0 percent real returns can be obtained with current stock valuations and the projected growth rate of profits. My calculations suggest that, if the other projections in the Trustees Report are correct, the real returns on stock will be approximately 3.5 percent (see letter to Martin Feldstein, 5-15-99, www.preamble.org).
I would like to know if the members of Congress participating in this debate would be willing to require that the Social Security Administration make projections of the components of stock returns, dividends and capital gains, which are consistent with their other projections, before they agree to place Social Security money in the stock market. If the answer to this question is no, I would like to now why these members of Congress believe that it is important to have careful projections for wage growth, life expectancies, and the all other relevant variables, when we can just solve any shortfall by using numbers on stock returns that have never been subjected to the same level of scrutiny.
