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Private accounts aren’t all that bad



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 Tuesday, 01 March 2005
Tuesday, 01 March 2005 08:48:00 (Central Standard Time, UTC-06:00) ( )

There are two primary objections to private accounts in Social Security. Depending on how you spin it, neither really hold water. Of course we might all drown before the water drains… ;)


The first is that private accounts do nothing to address the real issue, which is that the trust fund is going to run out of money. There are two solutions to this problem: put more money in, or take less money out. Private accounts means putting less money in, and so only makes the problem worse.


Bush’s plan to do private accounts merely means that he’s either going to come up with a whole new source of money to put into the fund, or more likely he’s going to opt to take less out. Much less, since he not only needs to overcome the currently projected shortfall, but also the increased shortfall due to the private accounts.


While this argument is valid, it really isn’t an argument about private accounts as much as about how to address the shortfall. Though the two things are somewhat linked, they are really separate issues and I think they should be discussed separately.


By enabling private accounts, all that we’re doing is exacerbating the shortfall to the trust fund – but that issue remains the same, only bigger.


The second primary objection to private accounts in Social Security is that people using them might end up broke when the want to retire. Though the historical trend of the stock market is in the upward direction, my financial planner and all my financial documents warn me over and over and over again that this is not a guarantee of future performance.


And I believe them. I still have mutual funds that are in the negative thanks to the Bush-era recession of the past few years. Money that I put into the market in the late 90’s, lost in the early 00’s and still haven’t regained. I have other funds that are doing very well, but my overall portfolio is growing at more like 4.5% than the 6% that is often used to project private account growth.


The answer to this of course, is that I’m only looking at a 6-8 year window. Investing is a long-term game. Long-term being longer than 8 years obviously, and more like 20 or 30 years. And there’s truth to that certainly.


But in my own personal investing I can and will start shifting my money from the market into more conservative investments as I get closer to retirement. I’ll intentionally sell my riskier funds when I think they are high, and I’ll buy more conservative funds.


I wonder if the Bush plan will allow me to do this with my private accounts? And even if they allow it, will the bulk of the American population understand they should do it? And if they understand they should do it, will they know how and when? Or will a whole new industry crop up around this so we can pay a “manager” to run our private accounts to optimize the gain? And who will regulate this new industry, and how much will it cost me? The government?


But in the end this is all moot.


Suppose the worst happens. Suppose that when I go to retire we enter another recession and all my private account money goes negative. Suppose my retirement monies fall from $3 million down to $250k in a week.


What then?


Then the government will bail me out. You know it will. We as a people won’t stand by and let an entire large group of people scratch out their last few years in abject poverty. Not after a lifetime of promising them that they have “social security”.


How will we pay for such a bail out? How did we pay for Social Security to start with? We taxed the young people to pay for the old. And we’ll do it again if we need to.


I think this is the biggest thing everyone needs to realize. Decades ago we made the collective choice that there should be a safety net for the elderly. I very much doubt that we plan to go back on this as a nation. That we plan to just throw the elderly to the wolves. Especially when these “elderly” are us! (or will be when it matters)


When push comes to shove, and it will at some point, we’ll be forced to bail out the system. And we will, because there’s an implicit social contract today, and it is still implied in Bush’s plan. The contract says that we won’t allow our elderly to suffer overmuch due to poverty.


So yeah, let’s do private accounts. They’ll work for a lot of people, and when they don’t work there’ll be a scandal and a bail out – but all the people to “blame” for it will be dead or doddering and they won’t know or care what’s happening.


Right now though, we should focus more on solving the trust fund shortfall than thinking about private accounts. Where to raise those trillions? Who's benefits to cut? These are the issues that press immediately on society.

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