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Stock Slump No Impediment to Reform, Says Skandia’s Dokken

May 4, 2001

In an op-ed in Investor’s Business Daily, Wade Dokken, president and chief executive of American Skandia and author of New Century, New Deal: How To Turn Your Wages Into Wealth Through Social Security Choice, argues that recent stock downturns shouldn’t put the public or the politicians off the idea of Social Security privatization. Following are excerpts from Dokken’s commentary. You can also click here to view Dokken’s appearance at a Cato Institute book forum.

“Those who profess to be shocked to discover for the first time that the stock market can’t go up 20% a year forever are only kidding themselves. But equally delusional are those who try to use these short-term fluctuations in the equity markets as justification for opposing President Bush’s proposal to allow Americans to invest part of their Social Security taxes through personal accounts. And I say this as a lifelong Democrat.”

“To begin with, people live longer than bear markets. Much longer. There have been 20 bear markets since 1900. The average break-even time (measured by how long it took someone who invested at the top to regain the value of a stock index portfolio) was three years. Under a personal accounts-based Social Security program, a person would begin investing in his or her early 20s, and on average would live another 50 years. At some point he or she would retire, but would not completely ‘un-invest’ by liquidating the account. Therefore, I submit that 50 years is the relevant holding period to use when analyzing Social Security accounts and assessing their risk.

“At my request, Wharton professor Jeremy Siegel calculated the best, worst and average annual equity returns for every 50-year period since 1802. His results are stunning: 13.1% is the best 50-year return on record, 5.0% is the worst and 8.1% is the average annual return on stocks over 50 years. Real after-inflation annual returns were 9.3% (best), 4.4% (worst) and 6.8% (average). To my mind, these figures are a powerful rejection of the critics’ argument that a near-term decline in equity values means we shouldn’t let Americans take greater ownership and control of their retirement destiny. Even Siegel’s lowest 50-year annualized real return, 4.4%, is 300% to 400% greater than the atrocious rate of return today’s young workers can expect to receive from Social Security if we fail to enact accounts-based reform.

“‘What if you didn’t have 50 years?’, some will ask. Or what if you were retiring right in the middle of a market correction? Even under these circumstances, it is proper to take the longer view. Government statistics predict that a person retiring today could easily live another 15 to 30 years (which, of course, is part of the reason we need to reform Social Security in the first place). Siegel’s research indicates this is plenty of time to weather a market setback. In the last 200 years, the average annual after-inflation return on stocks has been 6.7% for a 25-year holding period, 6.9% for a 15-year holding period and 7% for a 10-year holding period.

“In any event, there is no need for your portfolio to be comprised entirely of stocks. Bank certificates of deposit, bond funds, real estate investment trusts – some or all of these investment options, whose performance is not highly correlated to that of stocks, will be available to workers through their accounts. Diversification lowers risk and insures that losses in one investment may be partially offset by gains in another.

“Additionally, when you are investing for the long haul, a fall in stock prices represents a buying opportunity. If shares today are cheaper than they were a month ago, you can buy more shares for the same amount of money. Then when equity values rise, your profit is even greater. This technique, known as dollar-cost averaging, is actively pursued by many investors already, and is inherently undertaken by anyone with a 401(k) or similar retirement plan that automatically invests a certain amount each month.

“The bottom line, as Bush himself recently noted, is that ‘the plan is not going to be (to) invest in the lottery mutual fund or (to) take it to the track and hope to hit it right. It’s going to be in relatively safe investments.’ History amply demonstrates that stocks are relatively safe, especially when held along with other investments. As someone who has helped people save and invest for the long haul for more than two decades, I can attest that it is an axiom of finance that the right investment method or vehicle is one that is in sync with an investor’s time horizon. Building, and then enjoying, a retirement nest egg is an extended, half-century-long process. Therefore, no matter how the stock market performs during a given month – or year, or even decade – personal accounts are the best long-term solution for preserving and strengthening Social Security.”

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I thought this old post would be interesting in today’s Social Security debate.