Are you turning 65 when the
stock market takes a post-bubble dive? Don’t worry, you’ll
only have to wait until you’re 100 to retire under privatized
Social Security. The stock market can only go up, so say the same
right-wing salespeople who also told us the technology stock bubble
of the 1990s would never burst because the rules of capitalism had
been suspended. The “case” for Social Security privatization
amounts to much the same assurance that the old rules magically
no longer apply. Alas, the quite iron rules of capitalism tend to
enforce themselves no matter how disposable its most fervent cheerleaders
suddenly believe them to be when it is convenient. The belief that
the stock market rises over time is true, but only during the brief
periods of bubbles, which occur about every 35 years.
Add inflation, financial services fees, debt, and other inconvenient
factors, and Social Security privatization (still being promoted
by the Bush administration) is really scary. Let’s start with
a basic look at stock market numbers. There are two that really
matter, stock prices and a figure called the price/earnings (P/E)
ratio, the most common method of valuing stock prices.
The 20th century saw three stock market bubbles, each lasting several
years and peaking, respectively, in 1929, 1965, and 2000. (Despite
the downturn since 2000 stocks are still overvalued and therefore
we are still in the most recent bubble, which is where the P/E ratio
will come in.) The Dow Jones Industrial Average peaked at 381.17
in September 1929. The market lost about 85 percent of its value
in the next 3 years and took a long time to recover—the Dow
did not reach that figure again until December 1954. But that does
not include inflation. Using the U.S. government Consumer Price
Index figures, that basket of stocks was worth only 64 percent of
what it was worth in 1929. Better keep working.
Skipping ahead, the 1960s
brought a new bubble, which peaked with the Dow at 995.15 in February
1965. At this point, adjusted for inflation, the Dow was now worth
42 percent more than it was in 1929. Sounds impressive, but since
we had to wait 36 years, that works out to an average gain of little
more than 1 percent per year. That would have been the moment to
cash in because another crash set in, bottoming out in December
1974. At this point, the Dow, adjusted for inflation, was worth
only half of what it was worth in 1929 and little more than one-third
of its 1965 peak. Back to work.
It would take the century’s
third bubble for the stock market to show a positive return. Adjusting
for inflation, the Dow was below its 1929 value in 1991 and below
its 1965 value in 1995. As dazzling a figure as 10,000 might seem,
a 2005 Dow at that level represents a 65 percent inflation-adjusted
gain from 1965, not so fantastic since it took 40 years to achieve
that. As for those highly promoted technology stocks, the Nasdaq
composite average is worth one-third of what it was at its 2000
Now for more bad news. The
stock market remains, by historical standards, highly overvalued.
Because stock prices are, at bottom, a gamble on future corporate
profits, the basic measure of the value of an individual stock or
an entire market is the P/E ratio, which is the company’s yearly
profit divided by the price of one share. The basic measure of the
stock market as a whole is the P/E ratio of the S&P 500, the
500 largest companies on all the stock markets, which represent
about 70 percent of the total value of all stocks. The ratio’s
average, calculated back to 1872, is 14. Prior to the 1990s bubble,
the S&P 500 P/E ratio rose above 20 four times; each time it
subsequently fell below 10. In 2000, this ratio briefly was above
40, an all-time high, and today is above 20. Simply put, the average
holder of a stock is paying more than $20 for each $1 of corporate
profit, a level that has been unsustainable for all 133 years of
record-keeping because it means that stocks are too expensive.
There are two ways for the P/E ratio, that is, the value of stocks,
to return to a lower level—a drastic decline in stock prices
or a drastic increase in corporate profits. The first scenario has
followed every previous stock market bubble without exception. Because
corporate profits have risen so much since neo-liberalism (“supply
side” in the old terminology) was imposed with a vengeance
a quarter-century ago, there are limits to how much higher they
can go. Think you are working hard now? For corporate profits to
rise enough to catch up with current stock prices, the few who are
lucky enough to survive the mass layoffs necessary to create those
superprofits will be doing the work of three or four people instead
of two, as so many do today. You’ll drop from exhaustion by
the time you’re ready to retire, making your stock portfolio
If the second scenario is what brings stock prices into a normal
range, the result would be longer working hours, speeded up work,
and mass layoffs, all while stock prices stagnate for many years
because corporate profits would have to increase about 50 percent
just to bring stock prices in line with the historic average. Again,
all historical precedent is for P/E ratios above 20 to decline to
below 10, which implies a halving or more of today’s stock
values, which would result in the Dow Jones Industrial Average falling
well below its 1965 bubble-peak level. Stock prices should be rising
again sometime around 2035—only three more decades until you
can retire, if you time it just right.
Unfortunately, there is still more bad news. All these figures have
not taken into account management fees. At this point, market fundamentalists
might grouse that I haven’t accounted for dividend payments.
True. Except that most companies have stopped paying dividends and
many technology companies never did pay dividends. The reason that
dividends were paid is that stocks are frequently bad investments
and dividends were a necessary inducement for investors to gamble
on the stock market. This discussion will factor in dividends with
the final comparison between stock market returns and Social Security
returns. But what Social Security privatizers don’t tell you
is that much of whatever profits might be derived, if any, will
be eaten up by the fees charged to handle the privatized accounts.
Contrary to market fundamentalists screaming on all 500 channels
that private enterprise is always more efficient than government,
the administrative cost of Social Security is 0.9 percent of contributions.
The fees charged by mutual funds average about 1.5 percent. If everyone
is forced into mutual funds, the fees will be higher because where
else can you go? If you don’t think so, ask yourself why every
major issuer of MasterCard and Visa credit cards charges the exact
same exorbitant interest rates and late fees and why those fees
keep rising in unison. A cartel can charge more and your privatized
Social Security will have to earn more to make up what is lost to
fees. Of course the fees are based on assets, not on profits, so
the same fees will be taken even if the fund loses money, thereby
increasing any losses.
An unpublicized aspect of the Bush
privatization plan is that the government will take 3 percent above
the rate of inflation to cover the debt that would result from the
diversion of money into private accounts. What this means is that
the government will be loaning back to you your Social Security
taxes at 3 percent interest, to be paid out of what you draw upon
retirement. If your fund shows a profit of less than 3 percent per
year, you have already lost money.
A March 2005 study by Yale University economist Robert Shil- ler
shows a large majority of workers would lose money under privatization.
First Schiller calculated what would happen if, in the 21st century,
the annual rate of return of stocks (gains in prices, dividends,
and all else combined) remains at its historic rate of about 6.8
percent—a rate of future growth widely seen as unrealistic.
Under this scenario, 31 percent of the holders of the default “lifecycle”
privatized account would lose money. But future long-term stock
returns are likely to, at best, rise at a much slower rate. Demographics
are much different than 100 years ago, economic growth will be slower
in the 21st century, and the stock market was undervalued in the
early years of the 20th century, but is overvalued now. Shiller
then calculated that if stock returns show a long-term annualized
increase of 4.8 percent (a figure equal to the median real return
of 15 international stock markets for the 20th century), 71 percent
would lose money. The median prediction of 10 leading economists
surveyed by the Wall Street Journal is that the 21st
century will see stock market return growth of 4.6 percent.
Based on the financial industry’s own best predictions, three-fourths
of people who divert their Social Security money into privatized
accounts will lose money.
Underlying the schemes for privatizing Social Security is a double
set of books. The most pessimistic forecasts for Social Security
has it fully funded until 2042; this is predicated on a projected
annual economic growth rate of 1.9 percent. But the glowing pictures
of stock market riches are based on the economy growing at nearly
double that rate. This can’t happen simultaneously. If the
economy grows at the predicted 1.9 percent, then either stock prices
or corporate profits would have to rise to impossible levels for
the rosy forecasts of 6.8 percent stock gains to become reality.
According to a calculation by Princeton University economist Paul
Krugman, stock values would have to rise so much faster than the
economy that the P/E ratio would reach 70 by 2050 and more than
100 by 2060—the entire stock market would be priced higher
than technology stocks were at the height of the 1990s bubble. Impossible.
The other way to square this circle would be for corporate profits
to grow far faster than the economy. Corporate profits today account
for more than 10 percent of the national economic output; for stock
returns to yield 6.8 percent for more than 50 years while the economy
grows at 1.9 percent and the P/E ratio stays constant would mean
corporate profits would have to increase tenfold. That means corporate
profits would account for more than 100 percent of national economic
Some countries have privatized,
with disastrous results. The model usually touted for privatization
is that of Chile. In order to pay for the transition from its old
U.S.-style “pay as you go” system to the new one, the
Chilean government had to cut public spending, raise taxes, reduce
benefits, sell government assets, and issue debt. Fees and commissions
on the private accounts equal about 20 percent of contributions,
turning gains into losses. On top of that, upon retirement another
fee of 9 percent of assets is charged to convert the account into
an annuity. The Chilean system has done so poorly that in 1998 the
government asked workers not to retire following a sustained downturn.
It took a brutal dictatorship to impose this privatization, although
the military exempted itself, staying in the old system. The difference?
If two workers retire in 2005 after working the same number of years
with the same salary, the one who switched to the private system
in 1981, the year it went into effect, will receive less than half
of what the worker who was able to stay in the old system will receive.
The privatized system requires a government expenditure of 6 percent
of the Chilean gross domestic product, or one-third of the government
budget. The 6 companies that administer almost all the private plans,
however, collected an average return on assets of 50 percent from
1999 to 2003 and by some accounts are Chile’s most profitable
In Mexico fees are obscured under
various formulas, but median management fees have ranged from 24
percent to 30 percent of contributions since 1997.
Giant financial firms would be the big winners in the U.S., too.
Privatization of Social Security really means the taking away of
Social Security. If money is pulled out of Social Security, there
won’t be enough to pay those who remain and everybody will
be forced out. Here’s what Stephen Moore of the far right Club
for Growth and the Cato Institute said: “Social Security is
the soft underbelly of the welfare state. If you can jab your spear
through that, you can undermine the whole welfare state.” In
other words, it’s work until you drop.
Dolack is an activist, writer, and photographer who has organized
with the No Spray Coalition, Brooklyn Greens, New York Workers Against
Fascism, and the National People’s Campaign. He is the author
of The Winners and Losers of Fascism.