[quote]vroom wrote:
However, I’m saying you have to look after the risk involved. Maybe have some low guaranteed rate of return or something so you don’t end up with an entire generation of old people on the streets if the market goes south.[/quote]
You are right.
There are a few points that most idiot right-wingers that continue to insist on privatizing Social Security are missing; they clearly have no idea what they’re talking about, so let me provide some education:
The stock market has provided over 10% return on investment average over the years in great part because a) The amount of money invested in the stock market is relatively small (i.e., fluctuations are not THAT serious in both absolute and relative terms) and b) The large majority of investors know what they are doing, are patient and are responsible.
If one was to increase dramatically the number of people investing in the stock market, that could cause a series of catastrophic side effects, including, but not limited to, drastic inflation and dramatic fluctuations (high volatility, which costs a LOT of money even if people are not pulling out) – essentially, an unmanageable economy. The volatility would kill us.
This would be true (albeit less serious) even if one was to outsource the management of the portfolios (i.e., people didn’t manage their own portfolios) to professionals; those professionals, while performing relatively well now, would have to increase dramatically in numbers and hence the quality would go down, with much higher stakes; they would be prone to a level of fear and stress that would be devastating, since they would be managing several billions of dollars from people who CANNOT afford to lose all their savings.
People crack easily under that pressure – and stakes are so high that selling sprees, conflicts of interest, corruption and other problems would be extremely likely to occur. Furthermore, somebody would have to pay them – a LOT of money, since it is such a high-pressure, high-risk job – which would mean a high % of savings would actually go to the broker’s pockets, rather than to savings.
Even if we could, for a moment, forget that problem and be optimistic and assume that the brokers would do a great job, the fact is that with so much money flowing into the stock market it would saturate very quickly. Most of the growth of the stock market has historically been through increases in P/E ratios – but with this much extra money in, that would stop (P/E ratios would remain constant), and basically the stock market would start tracking with the GDP growth – which means no better returns than bonds.
So we might actually end up with the same poor ROI that we have now (with Treasury bonds) PLUS more volatility. We’d go from bad to worse.
The other alternative – privatizing the SS system and continuing to put the money mostly in Treasurys or other bonds – is asinine – because we’d have the same poor return, plus increased administrative costs!
Some have suggested that Social Security switched from Treasurys to Precious Metals – while still being managed by the US Government. It’s possibly the least bad alternative idea out there right now, but it causes a multitude of potential problems, especially since we all got rid of the Gold Standard – precious metals can now be extremely volatile and the market, being international, is open to rogue attacks. Also, the current spectacular returns are NOT here to say, and, over time, they will probably not return more than bonds.
The only realistic option is really to fund the existing system – we might make some improvements through increases in administrative productivity (i.e., reduce overhead) and better detection of fraud, but, all in all, we need to look elsewhere to cut costs (namely, the all time record income-tax-hogger, the DoD), and start worrying about increasing Government income through higher increases in the GDP (reducing our dependency on China would go a long way) and improvements in the tax system (to reduce loopholes, tax evasion, etc.).