The Center for American Progress has just released a new study detailing one of the more technical but also very real problems with the president's plan.
Regardless of what rate of return one estimates for private accounts over the longterm, in the real world, the rate of return is not a straight line. There are long bull markets, long bear markets, as well as sudden shifts in the stock market in one direction or another.
"While the real rate of return of the stock market has averaged 6.6 percent over the past 100 years," the study notes, "its average rate of return over 35-year periods has fluctuated between 3 percent and 10 percent." That of course does not take into account that you specifically have to cash out at a specific time, i.e., when you retire, and that could come in a trough.
(I say you're forced to do so because under the president's plan you have to use your account to purchase an annuity when you retire.)
What all of this boils down to, of course, is that whatever the average rates of return over time, some folks will do a lot better than others. Some will end up doing poorly enough that they simply won't have enough to support themselves in retirement. And there will be immense -- probably irresistible -- political pressure to at least bring those folks up to the survival level, if not up to a generous benefit. Needless to say, the government isn't going to be able to take the high earnings of the lucky folks to make up for the shortfall of the unlucky folks. So where does the money come from? It's another cost of the whole plan -- though not one it's proponents will make any mention of. Those costs are treated in this study. And the author of the study says they'll amount to another "$600 billion and $900 billion in present value terms to the costs of privatization over the next 75 years."
One other point: Above I used the terms 'lucky' and 'unlucky'. In normal private investing we recognize a substantial element of chance and unknowables. But we don't consider the whole matter an issue of luck or no luck since people make decisions about how much risk they're willing to shoulder, where they want to invest, which companies they think are winners and which aren't, and when they choose to cash out. But as the president's plans have emerged, it's become clear that the range of options you will have is quite limited, as is what you can do with it when you retire. And that means that whether you end up in one of the lucky 'cohorts' or the unlucky ones depends overwhelmingly on what year you were born in.
So using the language of 'luck' applies even more than usual.
Of course, this whole discussion of how you even out the peaks and troughs in market cycles for individual persons and separate generational cohorts only gets us back to why it makes sense to have the element of risk borne not by the individual or groups of people born in the same year, but by society as a whole. And that's what we have now with Social Security.