Liberals have been suspicious of Social Security personal accounts (aka “privatization”) in part because conservatives proposed the reforms. This is misguided. I invite them to step back and consider the political economy and the financial economics afresh. If they do, they will likely become enthusiastic supporters of properly-structured Social Security personal accounts.
Private Social Security accounts invested in long-run diversified equity portfolios promise substantial increases in the lifetime wealth of middle- and working-class Americans, at low risk, says Konstantin Magin, lecturer at the University of California, Berkeley.
For example, consider investing in an index fund tracking the S&P Composite (a diversified fund):
- The historical return on this portfolio since 1870 is roughly 6.6 percent per year, with a long-run variance that increases by 0.01 every year.
- Given this history, the likelihood that the initial investment will double over twenty years is 86 percent, and there is only a 0.4 percent chance that it will lose value in real terms over that period.
- Over a 30-year holding period, the probability that the initial investment will more than double climbs to 98 percent, and the chance that the portfolio falls in value is a mere 0.06 percent.
These high average returns and low long-run risks of diversified investments in stocks are historical facts, says Magin. To be sure, past performance is no guarantee of future results. But history remains our best guide.
Thoughtful economists on both the left and the right should support — indeed be enthusiastic about — Social Security privatization, says Magin. On the right, economists should be enthusiastic because Social Security privatization limits government power and enhances individual choice. On the left, economists should be enthusiastic because private accounts invested in diversified portfolios of equities promise extremely high returns at extremely low risk. The poorer half of Americans deserve to enjoy the benefits of these investments that make the wealthier half wealthier still.
Source: Konstantin Magin, “Why Liberals Should Enthusiastically Support Social Security Personal Accounts,” The Economists’ Voice, December 2007.