This past month marks three milestones that have had great impact on the retirement security of American workers: the Aug. 6 death of James H. Lorie; the retirement of Rex A. Sinquefield; and the 70th anniversary of the creation of Social Security.
Mr. Lorie, along with Lawrence Fisher, as professors at the University of Chicago, produced research that helped to revolutionize pension fund investing. Using data from the Center for Research in Security Prices, Messrs. Lorie and Fisher produced an influential investment analysis in 1964, showing the stock market returned 9% annually from Jan. 30, 1926, through the end of 1960, despite the Great Depression. The return was far greater than anyone expected and more than the return from bonds.
As a result, executives overseeing pension funds, endowments and foundations began to invest their assets in common stocks as well as bonds.
Mr. Sinquefield, who in late July announced his retirement from Dimensional Fund Advisors Inc., combined enthusiastic academic research into market and investment issues and a keen ability to apply such analysis to everyday problems.
He pioneered index investing and helped produce research into investment returns that, to this day, is an essential tool used by pension funds and other investors for asset allocation and benchmarking.
Mr. Sinquefield and Roger G. Ibbotson expanded the research of the Fisher and Lorie study and showed the long-term returns of large-capitalization stocks, small-capitalization stocks, corporate bonds, Treasury bonds, Treasury bills and inflation.
In 1973, he used his academic knowledge to create the first publicly marketed equity index fund. In 1981, with the founding of DFA, he pioneered indexed small-cap stock investing, offering a way to invest at a low cost in a segment of the market that historically outperformed the broad market while providing a source of capital to an area of the economy vital to economic growth.
Both Messrs. Lorie and Sinquefield have had an enduring impact on financing retirement income, helping fiduciaries to invest in more efficient and effective ways. But their work, and the valuable research of other academics that has been applied to great advantage to investors in the market, has been neglected in the operation of Social Security.
The 70-year-old Social Security system is immensely important in providing retirement income. But it has become a decreasingly secure source of retirement income and a drag on the economy through higher payroll taxes. It is dependent on taxes, ignoring the powerful effect investment and compounding returns can have on its trust fund.
"Short of war, no issue government can affect will touch the lives of the American people more than reforming Social Security," wrote Wade Dokken, president and chief executive officer of American Skandia Inc., in his book published in 2000.
Social Security is still stuck in the 1930s in terms of its financing and mistrust of investment, despite advances in ideas of financing retirement benefits.
Imagine if the program had invested at least some assets in companies in the late 1930s, how that capital would have bolstered the economy and the returns those investments would have generated. Despite financing reform efforts that have languished, Social Security proponents are still cranking the phonograph, while many of the rest of us have moved on to iPods.
Let's hope Mr. Sinquefield, as he moves on from DFA to create the Show-Me Institute think tank to influence public policy, will tackle the needlessly intractable Social Security problem and apply his immense knowledge and creativity to advance its reform.
