I’ve made this argument before. But it bears repeating because of a recent bipartisan proposal in Congress to fund the Social Security trust fund with the profits the U.S. Treasury could earn by borrowing $1.5 trillion and investing it in the stock market.
The proposal is garnering increasing support, not just on Capitol Hill but also from Wall Street.
Why is it Appealing?
It’s easy to understand why many are attracted to it. The proposal claims to overcome Social Security’s multitrillion-dollar deficit without raising taxes or cutting benefits. What’s not to like about that?
If only it were that easy.
The Fundamental Problem
The fundamental problem with the proposal is that it’s extremely risky: More than half the time since the founding of the U.S. in the late 1700s, bonds have outperformed stocks. So if the future is like the past, there’s a better-than-even chance that the Treasury’s foray into the stock market will cause the U.S. government to lose money. And Social Security will be in worse shape than it is already.
Proponents of the proposal calculate that the odds of success are much better than this. But they are guilty of focusing only on that portion of U.S. history in which stocks greatly outperformed bonds. Unless there is a good theoretical reason to ignore the more than half of U.S. history in which bonds outperformed stocks, the proponents’ arguments represent a triumph of hope over experience.
The Cumulative Performance of Stocks and Bonds Over Time
Bond Superiority: A 140-Year Period
One striking observation from the chart is the period between 1793 and 1933, during which bonds outperformed stocks. Surprisingly, stocks’ cumulative performance during this 140-year span was below that of bonds. This finding is significant as it accounts for more than half of the 230 years of U.S. market history.
The Unacknowledged History
It would be unfair to accuse the proponents of the Congressional proposal of intentionally excluding these crucial 140 years from consideration. In fact, it is highly likely that they are simply unaware of this historical context. The Center for Research in Security Prices (CRSP) at the University of Chicago, known for its gold standard database of historical market data, only goes back to December 1925. This precedent has been followed by most other stock and bond yearbooks.
The Flawed Start Date
This ignorance about older market data is not a solid defense, especially when billions of dollars are at stake. Professor McQuarrie highlights that there is no theoretical justification for the December 1925 start date of CRSP’s database. He explains that the original data collection team from the University of Chicago faced constraints, such as limited time and resources, which prevented them from going further back in history.
The Invisible Period
As a consequence of this unfortunate historical accident, the period prior to the mid-1920s remains largely invisible to most researchers in the field. This oversight restricts our understanding of the markets and robs us of valuable insights that could potentially reshape investment strategies.