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Thursday, January 06, 2005


the safety net

reason, in their inimitable way, advocates choice as the solution for many social ills -- and ridicules the suggestion that choice is best deprived the masses. this time in particular, they address the proposed social security privatization plan.

one of the commenters explained the program's impetus quite clearly:

If you look at the numbers, and I have done so exhaustingly, these ideas are so simple that it's frightening. All of the high-level arguments about this only serve to confuse people and muddy the waters.

Look at this simple example: a person that earns $30,000 a year with a wage adjusted 1.7% per year from age 22 to age 65. Take this person's complete SS contribution every year and place it in a Personal Retirement Account. Allow this person to diver that money to a variety of options, including Money Markets, CD's, Savings Accounts, Mutual Funds, Stocks, corporate bonds, annuities, federal treasury notes, and municipal bonds.

If this person were to see a yearly return of just 6.5% (which the employees of Galveston, TX who opted out of SS have in the last 20 years) this person, who only ever earned $30,000 in real wages, will retire with $1,075,000 in their retirement account. A guy that only ever earned $30k will retire a millionaire.

This is what we need to stress to people in these debates. Not privatization, not choice, not complication. Stress the fact that a married couple will retire with at least $1.7 million in the bank.
this analysis hinges upon this statement:

If this person were to see a yearly return of just 6.5% (which the employees of Galveston, TX who opted out of SS have in the last 20 years)
this suffers the error of projecting reductive recent past statistics into longterm future outcomes.

first, reductive: what is more true to say is that such employees garnered thousands of different returns that clustered around 6.5%. that is to say some lost 20% average annual -- others made as much.

i'd be interested to see the distribution of returns, frankly. in my education and experience, what small investors are best at is selling bottoms and buying tops -- because human information processing is emotional and crowd-oriented. (sorry, rational individualists.) markets are extraordinary at destroying emotional capital.

second, recent past into longterm future: we're coming out of one of the great bull markets of all time. history indicates that the united states stock market will probably trade sideways to down for up to two decades henceforth. the dow high of 1929 was not surpassed until 1954. japan is 15 years on from 1990 and the nikkei sits at 1/3 its high. secular bear markets last a long time and wash out *everyone* -- indeed, the function of a bear is to eliminate all possible sellers through widespread irrational pessimism. this inevitably includes just about every small investor, after significant and repeated losses have taught them futility.

in fact, one of the signs that japan may have finally bottomed recently is the fact that virtually no japanese citizen will invest in the stock market. this is where america's petty-stock-speculation culture is on its way to, i'm afraid. some years from now, this whole idea will seem a horrid boondoggle to everyone. and that would be just the time to jump into it.

this is where the idea of a "hedge" comes in, although that is the wrong term -- socsec can provide a *low-risk* account that provides a minimal safety net.

this allows the individual with private savings to take greater risks with their private capital without being denied a safety net. it has functioned in this way for decades already -- retirement assets are already privatized.

for those who do not have that luxury, it provides subsistence.

so one has to consider what the effect of this policy change could be. it seems to me that if one allows individuals who need subsistence to take their low-risk capital and allocate it to high-risk (ie the stock market), one is hoping that they allocate a sufficient amount into low-risk alternatives. that hope will, in fact, in millions of cases be betrayed. and these millions will, in the end, be poorer -- not richer -- for having had this choice. people being what they are, they'll also probably be angrier.

of course, none of this is to say the united states government does not face severe fiscal problems going forward. but this is clearly not the way to solve them.

I'm good at buying high and selling low!

Give me my SS money now. I'm taking it and heading for the tables at Ho-Chunk. It would be more fun that watching my losses on a statement.

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Retirement is for quitters. I'm putting my money on Declan's Moon on the first Saturday in May. I might change my mind and go with Fusaichi Samurai. Choice and risk make life worth living.

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