Personal Accounts in a Down
Market: How Recent Stock Market
Declines Affect the Social Security
Andrew G. Biggs
Imagine the following deal: You could invest part or all of your Social Security taxes in a personal retirement account. However, your account could hold nothing but stocks and you would retire during the biggest bear market since the Great Depression.
Would workers accept such a deal? I would. Even today, personal accounts would increase retirement benefits while giving workers greater ownership and control over their savings.
Slumping stock markets have opponents of personal accounts claiming vindication. A falling stock market, they argue, shows that only a traditional government-run, defined-benefit Social Security program can provide adequate retirement security. As Senate Majority Leader Tom Daschle (D-S.D.) put it on July 12, 2002:
After what's happened in the stock market the last few weeks, we think it's a terrible idea.…Imagine if you were retiring this week, with most major stock indexes hitting five-year lows. 1
Indeed, many Americans are sure to be concerned after hearing such comments.
But in judging the risks of long-term market investment on the basis of just a few months or years of returns, these opponents of personal accounts are victims of the so-called law of small numbers—the propensity to believe that a small sample is representative of the larger universe of outcomes. 2 Like those who took a few years
Originally published as Cato Institute Briefing Paper no. 74, September 10, 2002, and updated to reflect current information.