Sunday, February 13, 2005

The Long View
I am amused with some of the negative reactions to the President's interest in reforming Social Security. There's an inability with some to take the long view when reviewing the performance of the US stock market over the past several decades and have confidence that the potential for upside and higher average yearly returns should continue decades into the future. I find it difficult to understand why those who do not believe in the future of the stock market would, conversely, still hold a high degree of confidence that the government would continue to pay out healthy amounts of traditional Social Security.

In a macrosense, the health of the economy and the health of our governmental fiscal apparatus are closely linked. For those who defend the idea of maintaining the traditional Social Security system and are hostile to the idea of adding a system of private accounts, how can one simultaneously hold a confidence that the fiscal health of the government will have progressed unhindered 30-40 years out - able to fund annually a burgeoning Social Security system, while also believe that a 30-40 year timeframe of stock market performance is too risky to count on to provide for retirement funds? The holders of this attitude basically say, "I have utmost confidence that the fiscal health of my government will be sound 30-40 years out into the future and will entail no risk to, yet in that same 30-40 years I have no confidence that the private economy will have grown in any appreciable sense enough to provide for a healthy Social Security return through a private account."

If one is to believe that the economic performance of the private economy, over the next 30-40 years, will be stagnant and too risky to rely on, how can one also believe that the governmental fiscal state (which is linked to the health of the private economy) will be healthy over those same 30-40 years? I don't get this view. It seems to me to be a contradictory mix of dread with the economy and faith in the government. Believe me, if one is going to think that economic performance over the next 30-40 years will go down the dumper, then our government in that same time will have a lot of problems funding a lot of things, including big ticket items like healthcare and Social Security. Don't count on Social Security to be around if you're pessimistic about the long term prospects of the economy.

2 Comments:

At 7:38 PM, Blogger Kreblog said...

I don't think it is that far fetched that people would have this opinion, I mean the Social Security program was passed in the wake of the market crash of 1929 as part of the New Deal. Born from this event, the mere mention of Social Security drums up visions of the government stepping in to help when the free market is in chaos. Even if the truth is, as you pointed out, that the government would be unable to help if the market crashed again (to the level people dream), people like the idea of a "safety net".

My concern with the new plan is you give the public their money, hand them some prospectuses, say good luck, and hope they make wise financial decision and don't come back later to say "Um, can I have some more? I seem to have lost mine in the market somewhere." Could the government invest better than you, maybe not, but I have a feeling that it could when it came to a lot of other people out there. Maybe there could be a test you would have to pass first before you got your money to invest ;)

 
At 2:54 PM, Blogger Granite said...

Interesting points. Regarding the concept of a "safety net", demographic conditions such as average life expectancy and age of retirement worked to the government's favor during FDR's day, meaning few people were eligible to be caught by the proposed Social Security safety net. Advances in nutrition, healthcare, disease prevention, etc etc over the decades since FDR have altered those demographic conditions against the government's favor (meaning its promises to fulfill). The net is smaller and crowded since more people are eligible to fall into it.

I agree, a private account system of unlimited choice of investments may not be wise. However, choices limited to safer instruments such as bond and index funds would offer less market risk and still provide investment returns over the long run greater than anything Social Security provides.

A real attractive feature of private accounts is that they constitute real property that you own. Nest eggs saved under private accounts can be transferred to heirs and/or beneficiaries. This therefore becomes a vehicle of inheritance for families that perhaps have not had previously had the advantage of having.

 

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