Kevin Drum has a particularly good pair of posts
here and
here about the assumptions behind the numbers used to sell Social Security privatization.
In brief, the projection that Social Security will go insolvent in (e.g.) 2042 is based on assumptions about GDP -- that GDP will decline because, inter alia, population growth will decline. On the other hand, the projection that privatization can plug the gap is based on assumptions about annual returns -- that annual returns will be at least 5% and (according to most advocates) 6%-7%. But these are not independent variables, and it would seem to be difficult to conjure up a world in which the economy is growing at less than 2% but investments are steadily gaining 7%.
As Drum says in the comments to one of those posts:
- Historical real returns on stocks have been in the neighborhood of 4.5-5%. However, that's because (a) GDP growth has been about 3.5% and (b) PE ratios have increased, meaning that stock prices have grown even faster than GDP.
However, lower population growth means lower GDP growth. No way around that. And there's no good reason to think that PE ratios are going to go up yet again. In fact, it's more likely that they're going to fall a bit.
But privatization advocates keep claiming that stock returns can be high withough acknowledging that this assumes continuing high GDP growth. And even if they're right, this high GDP growth negates the very reason for private accounts.
It's a real shell game.
(FWIW, productivity growth has been very high for the past few years, and it's possible that it might stay higher than historical averages for a long time. If it does, GDP growth might very well be in the 2.5-3% range. I find this quite plausible myself although I don't know if I want to bet the farm on it just yet but if it's true then Social Security is in great shape. No need to do anything at all.)
