The road to prosperity, Wall Street has long maintained, is paved with investments in stocks. President Bush takes a similar position in urging private accounts as part of Social Security.
Who can argue?
Stocks have averaged an annual return of 6 percent above bond yields since the 1920s. No wonder roughly half the households in the United States have invested money in stocks, either directly or through a retirement account.
There's a catch, though. Stock markets don't hit the average each year. Performance runs in streaks: Many strong years can be followed by many lean ones. This repetitive pattern has mystified many market analysts. So young Americans, contemplating Mr. Bush's proposal to replace a portion of Social Security with an investment component, may have to factor in this market cycle, not just their age, when planning a retirement date.
Actually, all investors should perk up their ears if a 2003 paper by three economists is correct. Their forecast: Stocks for the next 15 years or so will be weak - returning maybe only a third of their historical average. The reason for this is even more surprising: demographics.
Since World War II, the US stock market has seen three distinct phases that match the boom and bust in population growth, the paper finds. The bull reigned in the 1950s and early '60s. Then the bear took power in the '70s and early '80s. Finally, a lively bull market ruled in the late '80s and '90s.
This pattern hangs on the economic life cycle of individuals, argue John Geanakoplos of Yale, Michael Magill of the University of Southern California, and Martine Quinzii of the University of California, Davis, in their paper. Young adults, age 20 to 39, are big consumers of goods and services. Middle-age people, 40 to 59, are more likely to invest in stocks to finance retirement. Older people tend to sell stocks to pay for retirement.
When a generation bubble comes along - in this case, baby boomers - it can have an outsize impact. There were 79 million people born in the US from 1945 to 1965 - a generation with 27 million more than the previous generation and 10 million more than Generation X.
When that group reached its biggest investing years - starting in 1985 - they sparked the latest stock- market boom. The trouble is that that generational fuel won't last, the economists argue. They believe boomers will be net sellers of stock after they start retiring in a few years, thereby decidedly depressing prices. The price-to-earnings ratio for stocks could be halved, speculates Professor Geanakoplos. That ratio for the Standard and Poor's 500 stock index today is about 20.
Of course, predicting stock prices is hazardous. There are other possible explanations for the postwar boom-bust pattern in stock prices. Maybe postwar peace shoved stock prices up. The quadrupling of oil prices in the 1970s may have depressed stocks. The latest boom could spring from the "new economy" - computers and dotcoms.
Perhaps, in the years to come, foreign investors could buy American stocks in such volume as to more than make up for the sales by retired baby boomers.
Companies could step up their reinvestment of earnings, rather than paying out so much in dividends, eventually stirring up economic growth and maybe stock prices, says Barry Bosworth, an economist at the Brookings Institution.
Which brings us back to the proposed private accounts for Social Security.
Social Security actuaries assume stocks will return an average real 6.5 percent over an individual's 45-year career in the years ahead, a fraction less than the historic record since 1802. A new survey of 10 Wall Street economists by the Wall Street Journal found a consensus of 4.81 percent. The three economists doubt even that.
Mr. Magill sees the plan for private accounts as "quite frightening" and "ill-advised," considering what happened to stock prices in the Great Depression. "It is a little akin to forgetting history," he says.
Geanakoplos favors private accounts, if they were on top of Social Security rather than subtracted from Social Security, and included special provisions to help the poor and those ignorant of finance.
Either way, boom-and-bust markets will complicate retirement planning.