Putting your eggs in one basket

In the past, I’ve heard passionate opponents of privatizing Social Security argue that won’t do because it would expose people to the vagaries of the stock market.

Detroit may prove that counting on taxpayers to fund your retirement is not better than betting that folks will continue to buy Coke and McDonald’s hamburgers. Especially so if taxpayers disappear.

There may be $4 trillion in unfunded public pensions. Not sure why people trust public officials with their retirement.

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13 thoughts on “Putting your eggs in one basket

  1. This argument has always been nonsensical. Nearly all 401ks and other such plans have the option to invest in bonds, even government bonds. Someone who was risk-averse could easily invest their entire private social security account in T-bills and never be exposed to that evil stock market the left hates so much.

    Ultimately though, they know people won’t do that. This is more nanny-state nonsense. They are trying to protect us from ourselves.

  2. I’ll be the first to admit that if social security were privatized I’d have no idea how to choose a stock portfolio.

    My assumption is that there would be some default option for folks if privatization happened. If that’s true, who gets to choose the default option? And if there was no default option, then well… how would it work?

    • Heaven forbid that you may have to read up or ask for some professional help. 🙂 The enhanced value of ownership (ability to pass on and earn a safe and higher rate of return) would more than pay for the help of a professional.

      As Lane writes, the default option could essentially be what you have now, with an added dose of market discipline (i.e. the loan to the general fund would be a tradeable security rather than a non-tradeable internal IOU).

      As ColoComment writes, though, there is a big political bloc against potentially letting go of that surplus money.

    • Deliberate ignorance is unforgiveable. There are many books, pamphlets and free literature (from mutual fund companies, esp.) at all levels of sophistication available for the inquiring mind. If you do nothing else, check the shelves at your local library. Even if nothing is privatized, you owe it to yourself to understand basic personal finance and investment.

      As each of my children graduated college & began their professional lives, I handed them a copy of Jonathan Hoenig’s book, Greed is Good, to serve as a general guide to intelligently managing their personal finances and as a beginner’s guide to investment. It’s written in a sort of breezy, conversationalist style (that appealed to my 20-somethings), yet Hoenig follows a logical progression from saving by spending beneath your means to building an emergency fund to basic investments to a last chapter on options.
      http://amzn.com/0887309844

      • Thanks for the book recommendation. I had given new graduates Andrew Tobias’, “The Only Investment Guide You’ll Ever Need”. I would describe it very much like you describe Hoenig’s book.

        I remember graduating and feeling woefully unprepared to manage my money. One of my first big purchases was a car. I had no clue how much I should spend. I think I lifted a rule-of-thumb from an article in Kiplinger’s Personal Finance magazine that recommended spending at or below 15% of your income on vehicles was a good idea.

        I also remember thinking that would have been something useful and practical to have learned in school and it seemed strange to have a sheepskin and to have learned that from a magazine.

        • I agree. Not an economics class, but rather a good, basic personal finances class in high school would be great, with real life exercises in saving & spending (like having each kid set an imaginary goal to save towards, keep a journal of all of his income and expenses, and an imaginary bank account to hold his “savings.”). Maybe the first semester of senior year, with an optional second semester concentrating on investing. Again, with real life investment exercises (like each kid investing an imaginary $xxx,000 in stocks and/or mutual funds, with prizes for meeting certain objectives). And risk: I’d like to see our kids get an understanding of the risk/reward concept. The class could read through an offering prospectus, line by line, paragraph by paragraph, and debate the pros and cons of an investment in the offering. Or somesuch…..

          I really like Hoenig’s book because from the git-go he emphasizes that it’s not amassing money that is good (in and of itself), but rather that having money increases the choices you have in life: what to drive, where to live, where to work, what schools your children may attend, what entertainment to seek, and so on. Lack of money limits your choices; availability of money [to you] expands them.
          The other thing he does that was good for my kids, was to encourage them to set reasonable and attainable incremental money accumulation goals.

  3. If I was to propose a simple default option it would be long-term US government treasuries. That’s essentially what’s happening with social security now as the trusts are used for federal govt spending and left with IOUs. Except that in the status quo scenario, those paying in to the trusts aren’t receiving any return.

    In terms of what is “fair”, I think the default option should be inflation-protected long-term US government treasuries (TIPS). This reflects the true cost of borrowing by the US government to US citizens – the nominal rate paid plus inflation over that period. In addition, that is the return that people should expect from their social security – they’re taking the risk inherent in investing in the US government so that is the return they should expect to receive.

    In practice, the major stumbling block (outside of political posturing, of course) would likely be management fees and how to allocate them for these funds. But a little common sense should solve this equally. The government’s equivalent of a 401k program for federal employees is so massive that management fees for a few very simple options (US treasuries, large cap equities, etc) is only a few basis points. Administering the whole country’s social security into government bonds should be so cheap that fees would effectively be zero (not to mention, probably cheaper than the current administration of the SS program). Beyond that, if anyone wants to get more risky with their investments then they should be liable for the fees involved. But I would caveat that by saying that this should go along with massive warnings on the effects of high fees on investments – as in making the entire cigarette pack into a surgeon general’s warning-level of disclosure.

  4. It will never happen. It’s politically improbable, if not impossible (except to those [few] pols who truly want to downsize government.)
    At this time the receipts from FICA taxes are thrown into the general fund to be spent in the present time on anything Congress/President chooses.
    Privatizing all or part of Social Security would deprive the federal budget of the related current revenues, thereby removing the subsidy to current spending that they provide. (Just as the most recent executive decision to pay all of Fred and Fannie’s revenues to the Treasury as a “dividend” also camouflages the true annual deficit levels of the federal government.)
    OTOH, should the improbable come to pass, the best part about any privatization of Social Security would be that (I presume!) the beneficiary would “own” his own retirement funds, to be passed to his heirs should he die before they were used up.

    • Good point. I think this may partially due the fact that so few voters understand how the SS financing works just as government employees don’t understand how their pensions are funded. Detroit, however, might be an eye opener.

  5. Where do I begin?

    “Begin at the beginning and go on till you come to the end: then stop.”

    One school holds that you should not put all your eggs in one basket. The other holds that doing so is best – as long as you watch your basket very carefully. The social security scheme run by the federal government wants us to believe that our best option is to let the feds put our eggs in their basket and that they will watch it.

    “There’s a sucker born every minute.”
    ― P.T. Barnum

    Redmonk worries that he wouldn’t have a clue how to invest his retirement savings if he was given the option. After the last decade, does he really think the wonks in DC have a better plan? Believe it or not, there was a time before social security when folks did this themselves and when they were investing their own hard earned dollars, they usually took greater care than government officials who deal with other people’s money and simply raise taxes when their foolish schemes go wrong.

    “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’
    —-Ronald Reagan

    Lane – the essence of the status quo is that there is no “account” set up for YOU specifically. The problem is that when SS was set up, the ratio of givers to receivers was high (due to demographics). We are now facing a situation where that ratio is being reversed (or at least getting closer to parity). The problem with using inflation adjusted products is that it’s the federal government’s definition of inflation. One problem with the feds managing an investment portfolio for its citizens is the same one we’ve been discussing regarding the human nature of bureaucrats – cronies, etc. will get the chance to line their pockets with your cash. The famous $10,000 toilet seat will be replaced by the $100,000 trading commission. The other problem is that just as large piles of cheese attract rats, large piles of cash attract…well, rats….but we call them politicians. Expecting the political class to keep their hands off this cash is like expecting Weiner to stop sexting on his cell phone. As far as “fair”, fair is I let you do with your earnings what you please and you allow me to do the same. Fair is certainly not letting the government hold my money for 40 years only to pay me some paltry sum (in real terms) because they said inflation was X when it was really 2X.

    Our social security scheme makes the Madoff scandal look like amateur hour.

    • Agreed on all points Mike. I was just keeping things as simple as possible for the sake of the academic exercise of “investing” the money and trying to keep as many of the countless other moving parts out as possible.

      You bring up a point that particularly irritates me in the government’s “definition” of inflation. There’s a lot of ways to see that the current calculation of PPI/CPI is essentially fraudulent. One I always notice is how many stories there are about the housing recovery, increasing rents, etc. But the numbers you see there never jive with official inflation measures. It’s not uncommon to see that housing/rent costs have risen 10% across the board in the last year. I’ve seen higher numbers cited too. These items comprise 30% of CPI, so even w/ no other inflation at all we should be seeing at least 3% inflation, yet the official numbers aren’t even that high. So either every news story citing housing costs is wrong, or something is broken/gamed in the data collection. I know which one I’m leaning toward.

      A great site I like that shows “real” inflation along w/ other stats (unemployment, etc.) is shadowstats.com

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