Market Impact of Personal Social Security Accounts
re: Fears of pumped-up profits are overinflated (USA Today Op/Ed 4/6/05)
To the Editors:
In addition to the misconception about personal accounts being a major windfall for Wall Street, the public also worries needlessly about “market distortions” caused by the influx of capital into the stock and bond markets.
With a current payroll tax rate of 12.4%, the total amount of payroll tax collected for OASDI (the retirement and disability portions of Social Security) in 2004 was $657 billion. If 4% of workers’ incomes (less than 1/3 of the current tax) had been allowed into personal accounts, there would have been $212 billion of cash available to the markets. If you assume 2/3 going into stocks and 1/3 going into bonds, that is $141 billion and $71 billion, respectively.
The average dollar value of stocks traded on the NYSE in 2004 was $46 billion per day with over $34 billion dollars worth of shares traded daily on the NASDAQ. An entire year’s worth of contributions is less than 2 days of aggregate volume (and less than one day if you include foreign markets) and would not cause any distortion when spread out over the year, as payroll tax deductions are.
The effect on the bond market from personal accounts is even less relevant. The average daily dollar value of US treasury securities trading in 2004 was just under $500 billion. Then there are the corporate and foreign debt markets. So the part of personal accounts investing in “fixed income” for a year could be swallowed in about half an hour of trading without a hiccup.
We should also remember that the stock market is not a zero-sum game. Wealth can be created, and availability of investment capital is the main ingredient. I might wish that a “distortion” would occur because that would mean that we’re all richer and might get mortgages at lower rates.
Any argument that Social Security will distort markets is a red herring. Our markets are more than large and liquid enough to handle much greater influxes of capital than are currently being proposed. I hope we are one day fortunate enough to give the markets a chance to demonstrate.
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