If letting individuals invest in the stock market (through private accounts) is such a great idea, what's wrong with the government doing it on behalf of the people through central management of social security assets? This would seem to avoid a number of problems:
- Individuals making dumb investment decisions, such as the emotional propensity to switch out of stocks at market bottoms and buy back in at tops. Or to adopt asset allocation strategies that are inappropriate for their personal time horizons.
- Exposing individuals to interest-rate risk when they annuitize their accounts on retirement (which they will probably be required to do). The income from immediate fixed annuities has historically varied over a range of about 2:1, and who can forecast interest rates 30-40 years in advance? For many, this could mean the difference between financial security and poverty.
- The huge social security funding gap that arises from the currently envisaged transition to private accounts.
A purported advantage of private accounts is that individuals will feel that they are in control of their money. But so many restictions will be placed on investment decisions, this is really an illusion.
Another touted advantage of private accounts is that individuals could pass the residual in their accounts to their heirs. But this is a separate issue. The government could do the same thing to social security accounts under central management.
I'm concerned generally about stock market investments for social security
-- however they are implemented. When the baby boomers retire, there would be a massive outflow of funds from the stock market which probably cannot be offset by the inflow of funds from the much smaller next generation. This is likely to result in long-term declines in stock prices, or at least much lower returns than we are used to.
Whether you fund the boomers' retirements by the sale of Treasury bonds or by the sale of stocks, you depend on one generation to provide the cash for the older generation. That's the fundamental problem. We boomers didn't have enough babies.
Comments?
Pete