Social (in)Security is still better than gambling on the market

http://www.JewishWorldReview.com | Exactly five years ago this month, the little guys were still pumping air into the stock-market bubble. February 2000 was "an amazing month" for the NASDAQ Composite Index, The New York Times reported. The exchange, heavy with technology stocks, had risen more than 19 percent in one month.

The index hit its all-time high on March 10, and then proceeded to crater. It quickly lost 61 percent of its value.

The fifth anniversary of the bubble's final days is a good time to recall what the boosters were then saying about stock investing. And we can compare their bullish babble with today's sunny predictions for private Social Security accounts.

I was there. Like many other workers, I had been dutifully making weekly contributions into my 401(k) plan. Because I had chosen conservative stock funds, my savings were not devastated. But they were bloodied, to be sure. And I remember looking at my annual Social Security statement with new respect.

Five years ago, people who had never before bought a stock were bidding up the prices of companies with few prospects of turning a profit. Some older Wall Street hands sounded the alarms and were accused of being scaremongers, if not sissies.

At the time, the PBS "NewsHour's" Margaret Warner asked Ash Rajan, VP at Prudential Securities, whether he told his clients that "the bubble could burst."

"Margaret, no. I don't," Rajan said flatly. "But I also tell them if they cannot handle the volatility (of stock prices), then they will have to really get out of the kitchen."

People, meanwhile, were scooping up copies of a ludicrous book titled "Dow 36,000." Authors James K. Glassman and Kevin Hassett had confidently predicted that the Dow Jones Industrial Average, then trading at around 11,000, would soon more than triple to 36,000. "Our own guess is between three and five years."

"If you wait too long, stocks will rise in price and returns will drop," the authors warned. "The benefits of the ascent to Dow 36,000 will pass you by."

And they ripped into the stock analysts then urging caution. "While the experts may not be very good at predicting what the market will do," Glassman and Hassett wrote, "they are brilliant at scaring people — not out of malice but out of a profound misunderstanding about stock prices."

History tells us that the Dow average did not zoom up to 36,000. It fell. Today, the Dow limps several hundred points below 11,000. The NASDAQ Composite Index, meanwhile, remains in the sewer, down about 60 percent from its March 2000 high.

"Dow 36,000" would be just an amusing curiosity today were one of its authors not out and about promoting private accounts for Social Security. Now a fellow at the American Enterprise Institute, Glassman is writing columns on the slam-dunk virtues of private Social Security accounts.

Glassman argues that since 1926 (almost 80 years), the average return for a conservative portfolio split 50-50 between Treasury bonds and stocks has been 5 percent after inflation — while Social Security offers at best a measly 2 percent.

One should not assume that yesteryear's stock-market returns will match tomorrow's. But even if you do, it's a mistake to ignore the fees that Wall Street hopes to charge the accounts. In Britain, which has long allowed private social-security accounts, fund managers were found to have consumed 20 percent or more of many individuals' savings.

Glassman is talking 80 years, longer than most Americans' lifetimes. People in their late 40s today will be retiring in 20 years. The stock market hasn't always showered riches over these shorter periods.

As Barron's magazine writer Jonathan Laing soberly reported in his famous "After the Bubble" article: "The last three stock-market manias that ended in 1901, 1929 and 1966-68 were followed by 15 to 20 years of horrible average annual returns, ranging between 2 percent and 5 percent — or zero to a negative 1.8 percent after adjusting for inflation."

I'm a red-blooded American, and I'm still in the game. But I put my 401(k) savings into stocks, knowing that if something awful happens to the market, there will always be Social Security to fall back on. To me, boring-but-safe Social Security is not a millstone around the workers' necks, but the bedrock on which we pile all our other retirement plans.

Froma Harrop is a columnist for The Providence Journal. Comment by clicking here.