drz-400
DP Veteran
- Joined
- Oct 12, 2009
- Messages
- 2,357
- Reaction score
- 551
- Location
- North Dakota
- Gender
- Male
- Political Leaning
- Conservative
Social Security is going to have to be changed in the next few years due to the baby boomer generation beginning to retire. I think everyone by now knows the story, but there will be a shortfall if we do not do something about this. Some have proposed we take SS funds as we do now, but instead invest them into the stock market. I have a few criticisms of this idea.
First, many like to point to the historically higher returns in the stock market. While this depends upon the time period being considered, over the long term I would agree with this assessment. However, since this has been true in the past, it does not mean that this will necessarily be true in the future, especially if we change the incentives facing investors in the stock market.
Consider this hypothetical situation, you know starting in two years the government will begin to invest $1 trillion into the stock market. What are you going to start doing right now? You are going to be buying stocks because you know they are going to go up in price like something we have never seen. So, the response of such a situation would be stock price rising RIGHT NOW. What does this mean for SS? It means SS funds will now be buying stocks at high prices, and thus actually lowering returns. Essentially, I view looking at historical returns on the stock market as predictors of future returns for something as huge as SS completely incorrect when you are vastly changing the investment landscape with such a proposal.
Also, those who point to the proposal for SS to invest in the stock market like to point to it as a way for individuals who previously were unable to take advantage of the stock market to begin doing so. While on its face this is true, whether this would actually be to the advantage of these people would be controversial. I do not have hard numbers on me, and I am not going to do the legwork to find them, but I do not think it is controversial to say that stocks are normal goods and as your income goes up you will own more of them. That being said, those who now own the most stocks would probably be those who have more income.
Remembering what was said previously regarding the changed incentives when SS moves to invest in the stock market, those with higher incomes stand to gain SUBSTANTIALLY MORE by such a proposal as they will be able to invest in stock before the run up of stock prices. When SS begins to invest in the stock market, those who earn lower incomes who can now "take advantage" of the stock market will now earn a much lower return, with the ultimate effect being a net transfer of wealth going to those earning higher incomes. You may view this positively or negatively depending upon your world views, but politics aside, this goes directly against the goals of SS reform in the first place, as it is supposed to be there as a safety net to subsidize those who have had trouble saving for retirement or are dealing with the burdens of old age.
A final argument against the investment of SS funds in the stock market takes into consideration the real world problems that would arise out if such a policy. Who do we invest in? Who do we not invest in? These are questions we would have to face. Now you may argue that most of stock being bought or sold are in the secondary market, and this is true, but that does not mean there is no benefit being given to these companies. Buying and selling stock on the secondary market gives the market more liquidity, which means if and when these companies do issue more stock there will be more willing investors ready to buy since their shares can be more readily turned into cash. We all saw the outcry when the government bought a majority of GM stock during the automaker bailouts, how would you feel if the government now owned 10% of every company on the DOW?
First, many like to point to the historically higher returns in the stock market. While this depends upon the time period being considered, over the long term I would agree with this assessment. However, since this has been true in the past, it does not mean that this will necessarily be true in the future, especially if we change the incentives facing investors in the stock market.
Consider this hypothetical situation, you know starting in two years the government will begin to invest $1 trillion into the stock market. What are you going to start doing right now? You are going to be buying stocks because you know they are going to go up in price like something we have never seen. So, the response of such a situation would be stock price rising RIGHT NOW. What does this mean for SS? It means SS funds will now be buying stocks at high prices, and thus actually lowering returns. Essentially, I view looking at historical returns on the stock market as predictors of future returns for something as huge as SS completely incorrect when you are vastly changing the investment landscape with such a proposal.
Also, those who point to the proposal for SS to invest in the stock market like to point to it as a way for individuals who previously were unable to take advantage of the stock market to begin doing so. While on its face this is true, whether this would actually be to the advantage of these people would be controversial. I do not have hard numbers on me, and I am not going to do the legwork to find them, but I do not think it is controversial to say that stocks are normal goods and as your income goes up you will own more of them. That being said, those who now own the most stocks would probably be those who have more income.
Remembering what was said previously regarding the changed incentives when SS moves to invest in the stock market, those with higher incomes stand to gain SUBSTANTIALLY MORE by such a proposal as they will be able to invest in stock before the run up of stock prices. When SS begins to invest in the stock market, those who earn lower incomes who can now "take advantage" of the stock market will now earn a much lower return, with the ultimate effect being a net transfer of wealth going to those earning higher incomes. You may view this positively or negatively depending upon your world views, but politics aside, this goes directly against the goals of SS reform in the first place, as it is supposed to be there as a safety net to subsidize those who have had trouble saving for retirement or are dealing with the burdens of old age.
A final argument against the investment of SS funds in the stock market takes into consideration the real world problems that would arise out if such a policy. Who do we invest in? Who do we not invest in? These are questions we would have to face. Now you may argue that most of stock being bought or sold are in the secondary market, and this is true, but that does not mean there is no benefit being given to these companies. Buying and selling stock on the secondary market gives the market more liquidity, which means if and when these companies do issue more stock there will be more willing investors ready to buy since their shares can be more readily turned into cash. We all saw the outcry when the government bought a majority of GM stock during the automaker bailouts, how would you feel if the government now owned 10% of every company on the DOW?