RE: Reply to Steven H. Johnson: Its my money

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

I think I belong to a very small group of people who believe
that Social Security reform ought to help this nation accumulate
TWO pools of capital - one pool in private accounts, one pool in
the Trust Fund.

I favor the two-track approach because I believe it lowers risk.
A Trust Fund capital accumulation strategy is lower risk if
accompanied by a private account capital accumulation strategy.
A private account capital accumulation strategy has much lower
risk if accompanied by a Trust Fund capital accumulation strategy.
The detailed argument behind this case is available at 
http://www.sscommonsense.org/

I am not criticizing the Cato plan because I'm opposed to privatization,
as one participant seems to think.  I criticize the Cato plan
because it's impossible.  Total stock market capitalization has
averaged 65% of GDP from 1925 through 1995.  The Cato plan 
would lead to personal accounts acquiring assets worth 120% to 
130% of GDP - at least half of which would be in stocks.

The Cato plan is also predicated on the idea that the stock 
market will continue to deliver seven percent real returns in the
future as it has in the past.  How many participants in this
debate have looked at the data series on which this contention 
is based?  It's the S&P 500 data series, so it doesn't really
apply to the entire stock market, it applies only to the stocks
included in the S&P index.

Real returns on the S&P 500 over the past seven decades break down
as follows:  2.3% real price appreciation on stocks, compounded
with 4.6% dividend yields, fully reinvested.

In other words, two thirds of the seven percent returns that 
Cato is betting on consisted of reinvested dividends.  You don't
get dividend yields of 4.6% in a market whose values are as 
overinflated as the current market's values.  Today's market
has a dividend yield of only 1.5%.  As soon as the current S-
curve run-up in stock prices levels off, investors are going to
discover to their amazement that the market's compound return
potential has fallen dramatically. Current prices have capitalized 
future year earnings further out than ever before.  

The market factors that delivered the 7% returns on which Cato
is counting so heavily simply don't exist now.  Yes, price
appreciation of 2.3% over the long run remains possible, but 
dividend yields of 4.6% are a thing of the past.

I don't criticize the Cato proposal on moral grounds.  I criticize
it on practical grounds.  The long-run return potential isn't there.
And, if it were, ie, if the Market Capitalization-to-GDP ratio were
once again at 65% - a level that would support 7% returns - then
the Cato proposal would quite literally soak up the entire stock 
market.  

-Steve Johnson.