What if that 3% bond assumption in fact turns out to be way too high? Some supporters of private accounts say that if the Social Security trust fund can't earn at least 3% on its Treasury IOUs, then the money won't be there for the promised traditional benefits anyway.
In other words, if Treasury bond real returns remain relatively poor over time, future retirees who rely solely on the traditional system would be more likely to see their benefits reduced.
That would be another reason for investors to take a chance in private accounts, supporters say; it isn't far-fetched, they say, that even if government bonds earn a real return of 2% or less over time, stocks might earn, say, 4% -- very low by historic standards but perhaps still better than the alternatives, and better than whatever traditional Social Security benefits might provide decades from now.
It is, ultimately, all guesswork. But what we know is that a 3% real rate of return on government bonds can't be had today.
At a time when many investors worry that decent financial asset returns will be tougher to come by in the next two decades than the last two, a private- account proposal with a 3% hurdle rate runs the risk of looking like too much stick and not enough carrot.
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Dwindled returns
Taking a very long view, the real, or after-inflation, total return on long-term U.S. government bonds has fallen sharply over 200 years.
Average annualized real return on U.S. bonds in four periods.
1802-1870: 4.8%
1871-1925: 3.7%
1926-1945: 2.2%
1946-2004: 1.6%
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Source: Prof. Jeremy Siegel; Ibbotsun Associates
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the web, visit www.latimes.com/petruno.
