In a snarky post titled, “Retiring, McCain Style,” Matt Yglesias points to a chart showing that since McCain initially proposed Social Security private accounts in his 2000 presidential run, the Dow has gone down 8 percent. It’s a common tactic among liberals to seize on short-term market fluctuations to invalidate the entire idea of private accounts, but they make a huge error by neglecting the fact that private accounts are voluntary and would only make sense for younger Americans. Any financial advisor will tell you that it makes much more sense for somebody who is, say, 30, to invest aggressively in equities, because that person will have the luxury of time to ride out short term market fluctuations, whereas somebody in their late 50s would be much better off parking their money in bonds and cash that offer lower returns in exchange for more stability. What Yglesias essentially is saying is that if people who were approaching retirement in the past eight years would have bet their retirement savings on the stock market, they would be worse off — but those are the people who would be least likely to take advantage of private accounts (in fact, the Bush proposal didn’t apply to anybody over 55).
So when talking about private accounts, what’s relevant is market performance over a period of, say, 30 or 40 years. Though I generally think the S&P 500 is a better way of measuring stock market performance than the Dow over the long haul given its broader components, for the sake of consistency, I’ll point out this Google finance chart showing the performance of the Dow between January 1970 and today (which would represent the time between somebody being 30ish and retirement). The aggregate gain: 1,268.1%. So I’d love to make a deal with Matt. How about I get to invest my payroll taxes in the stock market, and he gets to stay in the current Social Security system? We’ll meet up in 40 years and discuss who ended up better off.
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