If defined benefits, which permit people to take risks with other saving, could no longer be counted on, most people would have to change their risk-return calculation on the investment of personal wealth other than the private account. Saving for retirement could be pushed aside by other legitimate personal needs. It is not just the losers, by the way, who could wind up disappointed. For equities now to render a comparable return, economic activity would have to advance more rapidly than the economy's long-term growth potential, which is unlikely to be significantly higher than 3 percent a year at a time of relatively small increases in the labor force and only the most tentative evidence that the productivity growth trend has accelerated. Stepped-up productivity has to be tested over a business cycle, not just in a cyclical expansion.
Prospective returns get almost no help from current dividends, which are at an unprecedented low.
Finally among the cautions about returns, broadly defined, is that someone is going to have to finance the transition from a public to a privatized system. Devoting part of the Social Security tax to private accounts will mean that the current workforce will have to fund its own pension as well as its parents'. The existing liabilities of the system will not go away with privatization. Transition taxes, by the way, are the only means by which privatization would add to national saving. The Context of Overall Fiscal Policy Discussion of privatization requires some thought about the broader fiscal background.