Collecting Social Security at 100

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 irrelevant. 

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. 

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 output. Impossible. 

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 industry. 

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.