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Jewish World Review Sept. 14, 1998 / 23 Elul, 5758

Thomas Sowell

Thomas Sowell Taking stock

THE BIG DOWNTURN IN THE STOCK MARKET will undoubtedly be used as an argument against letting individuals invest their own Social Security money privately. However, the ups and downs of the Dow Jones average mean a lot more in the short run than in the long run -- and pensions are long-run investments.

Over almost any period of 20 or 30 years, the stock market pays off better than Social Security does. The recent plunge in the stock market doesn't change that. Many a baseball team has lost a double-header and then gone on to win the pennant.

My own pension fund is invested in the stock market. If the present drop in the Dow Jones average is not good news for me, there was even worse news when I first put my pension contributions in stocks. Almost immediately, the market headed south.

At the end of the first six months, my pension fund had less money in it than it had at the beginning, even though I had been paying in new contributions every month. Eventually, of course, the market turned up. Even though it has now plunged down again, the current Dow Jones average is still way above the 3300 level that it had when I first put my pension fund money into the stock market.

Of course, it would have been better for me if the Dow Jones average had stayed above 9000, as it was in July. But, even after it plummeted down into the 7000s, that still meant that what I first paid in was worth more than twice as much as I paid.

For short-run investments, however, the kind of roller coaster that the market has been on recently can spell disaster. But the stock market is not the place to be, for those preoccupied with the short run, unless they are real experts.

Obviously, as each person gets older, there comes a time when all they have left is the short run. At that point, it makes sense to start thinking of more stable places to put their money. At any age, it makes more sense for someone unfamiliar with the stock market to think of investing through financial specialists, such as those who run mutual funds, than to try to pick individual stocks.

Politicians who oppose letting individuals invest their own Social Security money conjure up an image of Joe Sixpack trying to pick stocks on Wall Street. But most people are well aware of what they don't know -- unlike politicians and intellectuals. Just as most people go to doctors with their medical problems and to repair shops with their automobile problems, so they can take their retirement money to financial specialists.

The existing Social Security system could still be left in place for those who are fearful of any kind of private investment. What the privatization of Social Security would do would be to allow others to do otherwise.

It is not just individuals who can benefit from the option of privatization. The country as a whole can benefit.

One huge difference between private investments and Social Security taxes is that private investments increase the total amount of real wealth and productive capacity in the economy. Private investments create factories, computer networks, apartment buildings and other real assets.

The money paid into Social Security creates no real assets. It is just more money for politicians in Washington to play around with, leaving it to future administrations and future Congresses to figure out how to take care of future retirees. The so-called Social Security "fund" consists of paper representing transactions whose net effect is to make the national debt look smaller than it is and to provide a legal claim against future tax receipts.

None of that represents an increase in the nation's real wealth or productive capacity, from which pensioners could be paid. If Social Security produced real assets, like private investments, then we would not have to worry about how many young workers there will be in the future to take care of old pensioners. The old pensioners would be paid from the earnings of their own investments -- and the number of young workers would be irrelevant.

One of the biggest objections to privatization is ideological. The very idea that individuals will look out for themselves is anathema to those who like to play the role of guardians and saviors of us all. It is not a coincidence that the same people who oppose school vouchers or gun ownership also oppose the privatization of Social Security.

Individual self-reliance shatters the vision of those who think it is their job to run our lives.

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4/22/98: Playing fair and square
4/19/98: Bad teachers"
4/15/98: "Clinton in Africa "
4/13/98: "Bundling and unbundling "
4/9/98: "Rising or falling Starr "
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2/20/98: Dancing Around the Realities
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2/6/98: A rush to rhetoric

©1998, Creators Syndicate, Inc.