Questions for Ann Combs

["Steven H. Johnson" <info@sscommonsense.org>]

Ms. Combs-

I have a four-part question about the validity of the assumptions 
on which advocates of privatization normally base their case.

Before asking these questions, though, I want to say in preface 
that I favor a long-run solution in which each year's Social
Security payments to beneficiaries are financed as follows:
two-thirds by pay-as-you-go payroll taxes, 
one-sixth by the earnings from a strong Trust Fund, 
and one-sixth by PRA-financed annuities.

But I am not optimistic about the stock market's alleged ability
 to generate seven percent real returns in the future.
Nor am I optimistic about the stock market's capacity to absorb
a limitless amount of privatization-driven investment.  
My questions are as follows:

1) Isn't it the case that seven percent returns historically have
consisted of real price appreciation of about 2.3 percent a year,
coupled with a dividend yield rate of 4.6 percent, fully
reinvested?  And that these are the returns a hypothetical 
investor in the S&P 500 could have realized?  And not necessarily
representative of what a 5000 stock index would have generated?

2) And isn't it the case that stock prices - over the long run, for 
the market as a whole - are likely to grow at about the same rate
as the GDP?  In other words, no faster than 2.5 percent to 3.5
percent?  

3) Won't dividend yields therefore continue to play an important
role in long-run stock returns?  And isn't it the case that 
dividend yields, for the stock market as a whole, have now 
dropped into the 1.5 percent range?

4) On the issue of investment absorption capacity, isn't it 
the case that the average capitalization of the stock market, 
relative to GDP, has been about 65%, or maybe less, between 1925
 and 1995?  And isn't it the case that the PRA's you advocate 
would ultimately accumulate a pool of capital that would also 
be somewhere in the 60% to 70% of GDP range?  Implying, obviously,
that an aggressive PRA program is capable of soaking up the vast
majority of all stocks on the U.S. stock market.

I look forward to reading your answers.  Thank you.

-Steve Johnson.