Social Security and the Historical Fallacy

The topic of social security is probably going to take up a bunch of posts in the future.

However, I just wanted to point out that just because something has been a certain way in the past, does not guarantee that it will be that way in the future.

The argument for allowing younger workers putting money into stocks instead of social security goes like this. The stock market has risen at an average of 10% per year in the past. It has weathered recessions. It has lost 40% in one year and bounced back. The stock market is a great American Success Story. Of course it will continue over the long haul to go up approximately 10% a year. We have a whole 100 years of history on our side.

Of course tulips will go up in value, they always have. ... There's no safer place for your money than tulips.

But what about the baby boom? What about all those Americans that will be retiring at the same time and taking their money out of their 401ks at the same time? What will that do to the stock market? I read that promoters of the social security plan are going to spend 100 to 150 million to convince the American public of the wisdom of stocks. You don't lay down that kind of change if you don't stand to make money off of the plan.

To insert a bit of Keynes here: Maybe the reason the stock market has done so well in the past is that American workers have had a bit of job security and a bit of security in their old age. The post world war two generation was the first generation that didn't have to support both aging parents and children in their prime income producing years. They turned into consumers and they begat consumers.

If businesses were run in the interest of shareholders rather than CEOs and cronies, they would be fighting this social security thing tooth and nail. Because in the long term, capitalism needs consumers. Consumers need to be free to spend their money. If every last cent is taken up supporting parents and children and Uncle Hank who didn't do too well with the stocks, the American consumer will not be consuming.

If we change our policy on social security, that will affect stock prices. If baby boomers retire, that will affect stock prices. If American companies become so bloated and mean that workers can't consume, that will affect stock prices.

History is only the story of the past. Things that happened may affect stock prices in the future. But History itself--the golden age of the 10%-- does not affect stock prices.