Rate of Return Nonsense

by Dick McDonald Ownership Society Institute

The most effective argument against the privatization of Social Security and Medicare that Democrats and their propagandists have used to defeat any meaningful discussions is “the stock market is too risky.”

Ignoring the reality that almost all existing government and private retirement and old-age medical plans invest in the stock market (with the exception of Social Security and Medicare which are pay-as-you-go “Ponzi-type” schemes) their “too risky” propaganda doesn’t hold water.

First we have to consider what we are doing in crafting plans to finance Social Security and Medicare costs. Isn’t it true that we are looking to finance costs that won’t arise until after the taxpayer retires from an active working life of 40 to 50 years? Therefore we need to craft a plan that is very long-term in nature not short-term.

This brings us back to the rate of return nonsense that is accepted by so many Americans – “the stock market is too risky.” Well it isn’t risky over the long-term. In fact its average rate of return in 40-year increments ever since the S&P 500 started being tracked in 1871 is almost 10% per year.

In its long march from 1 to today’s 12,000 the DOW industrial average has experienced dramatic “short-term” swings. The DOW fell 60% in the great depression. Generally it falls 40% in recessions. In today’s Great Recession it fell 50%. It tumbled from 12,000 to 6,000. However, we are not in unchartered waters. The market always rebounds and then moves higher. Isn’t it over 12,000 today?

Now let’s add to the anti-privatization rhetoric the common argument that I can only get 1% interest on my savings account. Well bank interest is not worthy of discussion. Let’s take a look at the rate of return stocks have experienced on the rebound as of today February 26, 2011.

1. The DOW is up 85% from its March 9, 2009 low.
2. NASDAQ is up 119% from its March 9, 2009 low.
3. S&P 500 is up 95% from its March 9, 2009 low.

Therefore if you funded your retirement on March 9, 2009 your portfolio has probably doubled in value. Now discard the nonsense about bank interest and embrace stocks – they are our salvation.

The long-term advantages of investing in a fund of stocks that track average rates of return are undeniable. A plan that invests in indexed-type stock funds is the only answer to solving our present entitlement-debt crisis.

By replacing Social Security and Medicare with a reasoned stock-investment plan we not only solve our debt problem but our economic problems as well. By investing our annual payroll taxes of $1 trillion in the stock market will generate trillions in new economic activity and tens of millions of jobs.

We must realize such a plan will make even a janitor a millionaire at retirement. The rich will become richer and the country that promised shining city on the hill. It will deliver the American Dream, not the political one but the one we all day dream of.

Today society is in a budget-cutting frenzy to solve its financial problems. However they are ignoring the revenue factor. New Congressman Colonel Adam West put it bluntly this morning “we don’t have a revenue problem we have a spending problem.” I totally disagree, we have both and the Tea Party is missing the boat by agreeing with West.

Republicans, Tea Partiers, Democrats and the talkers are presently recommending less than 1% solutions to our endemic spending problems and zero on direct revenue raising solutions. The solution in raising revenues is not by raising taxes but increasing tax revenues which only occur in a free society when tax rates are low and the returns on investments high.

Now if you understand the rate of return issue turn your focus on to increasing economic activity by reducing tax rates. The attending increase in economic activity will solve many of our problems by exploding the tax revenues without raising rates.

Those interested in cutting Federal taxes by 40% and reducing the average tax load on Americans by 40%, solving our debt crisis and exploding the economy upwards might consider the plan enumerated here.

The rate of return will take care of itself. Invest in America.