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Social Security and the Stock Market

drz-400

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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?
 
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?

I believe you to be correct. About all of that.

Forunately the one thing that prevents the government from investing in the stock market is that the government doesn't have any money to invest. The SS system actually has no money, it was spent a long time ago and new SS revenues go towards paying earlier investors - just like a ponzi scheme.
 
I believe you to be correct. About all of that.

Forunately the one thing that prevents the government from investing in the stock market is that the government doesn't have any money to invest. The SS system actually has no money, it was spent a long time ago and new SS revenues go towards paying earlier investors - just like a ponzi scheme.

Thank you, I was actually going to add a section on this as well. In order to invest into the stock market SS would have to convert itself from a situation where current taxpayers pay for current beneficiaries to at least a partially funded system. The may have worked well when revenues actually exceeded outlays (the broad majority of SS existence), however, the reason for reform is EXACTLY because this will not be the case. Therefore, in order to achieve partially funded status given the squeeze put on by the baby boomers we would not only have to raise enough revenue to pay for them, but also raise in excess the amount we wish to put into the stock market. It would be extremely expensive. To just cover the boomers right now, the actualarial gap is about 3% payroll. If we raised payroll taxes 3% right now, we would be able to meet all of the payments for the next 75 years. So tak on whatever you want to put into the stock market. That doesn't seem very palatable.

Many would raise the objection about a "Ponzi like" situation, and there are similarities. However, what SS has done so far would be IMPOSSIBLE if it were a true ponzi scheme. Where does SS actually invest its money? It invests currently in the growth in productivity, or the innovation of our country. This might sound lame, but it is true. SS has been able to be solvent for so long because its workforce has continued to become more and more productive, and hence real wages rise and more tax revenue comes in, despite a growing disparity between # of workers and # of beneficiaries. However, we know in the next few years this will fail to be enough.
 
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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?

That's the problem with decisions being done in aggregate.
The information is plainly visible, causing negative situations to occur.

Better to implement mandatory IRA's where there is a mix of investments to help stem the flow of an over priced market.
 
I believe you to be correct. About all of that.

Forunately the one thing that prevents the government from investing in the stock market is that the government doesn't have any money to invest. The SS system actually has no money, it was spent a long time ago and new SS revenues go towards paying earlier investors - just like a ponzi scheme.

SS does have money, currently in the form of special federal government bonds, that do not pay a high interest rate. Money the US government will have to pay back from general revenues as opposed to SS revenues for a period of time
 
SS does have money, currently in the form of special federal government bonds, that do not pay a high interest rate. Money the US government will have to pay back from general revenues as opposed to SS revenues for a period of time

That is mainly just a matter of left vs right on the ledger. Either way we need to find a way to raise the revenue to achieve that.
 
That is mainly just a matter of left vs right on the ledger. Either way we need to find a way to raise the revenue to achieve that.

Higher taxes, a cut in discretionary spending or a combination of the two. SS to my knowledge has enough in reserves to cover its obligations for at least 10 years. Provided the US government does not default
 
That's the problem with decisions being done in aggregate.
The information is plainly visible, causing negative situations to occur.

Better to implement mandatory IRA's where there is a mix of investments to help stem the flow of an over priced market.

And how do we pay for current beneficiaries while we transition to a fully funded system? We cannot just save all of the money brought in for SS because that is currently being spent on current beneficiaries, and this revenue is about to become inadeqaute to even do that.
 
And how do we pay for current beneficiaries while we transition to a fully funded system? We cannot just save all of the money brought in for SS because that is currently being spent on current beneficiaries, and this revenue is about to become inadeqaute to even do that.

Cuts in spend towards other areas and general taxation as opposed to specific taxation for the program.
 
SS does have money, currently in the form of special federal government bonds, that do not pay a high interest rate. Money the US government will have to pay back from general revenues as opposed to SS revenues for a period of time

Theoretical investments in gov securities, maybe it does have that. But what would happen if the SS tried to cash out those securities today? Would the gov be able to do that (without printing up some more money or siezing wealth)?
 
A while back someone tried to convience me that SS was not an entitlement. He insisted that there was actually an account with his name on it that contained X amount of dollars, and he proved it to me by showing me his annual SS statement. You know, I get one of those also. So did Bernie Maddoffs clients. Just because something is printed on a piece of paper doesn't mean that it's true.

I suggested to him that if he thinks there is really an account with his name on it that contains that much cash, to try to cash it out. He said that he can't because he is not old enough. I just snickered and told him that as soon as he is old enough he should demand a lump sum payment for that money in leu of monthly payments. I think we all know how that's gonna work out.
 
Theoretical investments in gov securities, maybe it does have that. But what would happen if the SS tried to cash out those securities today? Would the gov be able to do that (without printing up some more money or siezing wealth)?

It would have to use money from general revenues typically spent on dicretionary spending like the military.

So it would either have to cut spending in those areas, or increase income taxes (or others) to pay for the money owed to SS ( or combination of the two). It would mean debt held by the public would increase, while debt held by other government institutions decreases
 
A while back someone tried to convience me that SS was not an entitlement. He insisted that there was actually an account with his name on it that contained X amount of dollars, and he proved it to me by showing me his annual SS statement. You know, I get one of those also. So did Bernie Maddoffs clients. Just because something is printed on a piece of paper doesn't mean that it's true.

I suggested to him that if he thinks there is really an account with his name on it that contains that much cash, to try to cash it out. He said that he can't because he is not old enough. I just snickered and told him that as soon as he is old enough he should demand a lump sum payment for that money in leu of monthly payments. I think we all know how that's gonna work out.

Of course SS is no an investment plan, it is a funded entitlement, where what you get out is tied to some degree what you put in, up to a maximum
 
It would have to use money from general revenues typically spent on dicretionary spending like the military.

So it would either have to cut spending in those areas, or increase income taxes (or others) to pay for the money owed to SS ( or combination of the two). It would mean debt held by the public would increase, while debt held by other government institutions decreases

So this would not be a good time for a young person to start planning to be a career military person?
 
So this would not be a good time for a young person to start planning to be a career military person?

I would say not

The US military is going to be cut, in real terms ( ie constant dollars) I would not be suprised to see a 20% cut back. In nominal terms probably 10%. The US does have a revenue and spending issue, and despite what some would like, entitlements and or social spending will not be cut enought to balance the budget without cuts to the military as well. The cuts wont seem as dramatic as the cuts to the UK military, as the US does have a heck of a lot more equipment and reserve capabilities. Mothballing a carrier and its associated group will still mean the US has about 5 times the number of carriers as any other navy, and still have far more then 5 times the capability of the other navies carriers
 
Of course SS is no an investment plan, it is a funded entitlement, where what you get out is tied to some degree what you put in, up to a maximum

I think it's more like insurance, unfortunately, insurance only works correctly when the event that you are ensuring against is highly likely to happen. Like living to age sixty something.

Those statements we get in the mail are very misleading. What we get from SS has very little to do with what we pay in. The system is very convoluted. There is a maximum monthly amount, but that is not determined by how much total you put in, they are determimined by the average amount of the top X quarters. If one has a few really good quarters, but doesn't make (or pay in) crap the rest of their lives, they could easily qualify for the max SS, while others who paid in more may not qualify for as much. And of course if ya don't make it to the magic age, you loose it all, and if you live forever you would make out pretty good.
 
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.

2 very big flaws in the theory... First one is 1T in the stock market is pennies. That's about the amount of money traded daily.

The other flaw is social security can never go private and invest because it is based on a ponzi scheme. They call it "pay as you go", but there is no money in your SS account. It relies on others to pay you when you retire. If SS put money into your account to invest, then it would be unable to make it's payment obligations to those who are retired now.
 
2 very big flaws in the theory... First one is 1T in the stock market is pennies. That's about the amount of money traded daily.

The other flaw is social security can never go private and invest because it is based on a ponzi scheme. They call it "pay as you go", but there is no money in your SS account. It relies on others to pay you when you retire. If SS put money into your account to invest, then it would be unable to make it's payment obligations to those who are retired now.

At least we all agree on that.
 
Couple of thoughts:

One, while as AB notes, if SS tried to immediately chang to a system whereby it put 'real money' into your account, it couldn't, for the reasons he noted. But, IIRC - and I may not - I thought the proposals being floated were not to change immediately to a 'private account' system. Instead, each new age cohort beginning at some relatively young specified age and time would go into the private account system. Those already in the system would stay where they are. Clearly, this doesn't do away with the Ponzi scheme aspect in total, but under the proposals (as I remember them), it is eliminated over some number of years, as new age groups join and older age groups er, move on.

Second, I really don't like the idea of mandating that any participants in such a scheme invest only in equities, especially in individual equities. The vast majority of participants just don't know enough and likely will never know enough to have a reasonable probability of success. Perhaps a choice of index funds, both equity and fixed income would offer a better chance of an acceptable long-term risk-reward ratio.

I have a couple of other objections to the system as I remember it, but will save those for further discussion.
 
Couple of thoughts:

One, while as AB notes, if SS tried to immediately chang to a system whereby it put 'real money' into your account, it couldn't, for the reasons he noted. But, IIRC - and I may not - I thought the proposals being floated were not to change immediately to a 'private account' system. Instead, each new age cohort beginning at some relatively young specified age and time would go into the private account system. Those already in the system would stay where they are. Clearly, this doesn't do away with the Ponzi scheme aspect in total, but under the proposals (as I remember them), it is eliminated over some number of years, as new age groups join and older age groups er, move on.

Second, I really don't like the idea of mandating that any participants in such a scheme invest only in equities, especially in individual equities. The vast majority of participants just don't know enough and likely will never know enough to have a reasonable probability of success. Perhaps a choice of index funds, both equity and fixed income would offer a better chance of an acceptable long-term risk-reward ratio.

I have a couple of other objections to the system as I remember it, but will save those for further discussion.




Other issues would be management fees, a well run government SS system with the ability to invest in things other then low interest government bonds would have low management fees, and be able to cover a wide variety of investments other then mutual funds or ETF's


The Canadian version of SS (CPP) is run this way and has made investments in a wide variety of investments, from real estate, equities to LBO. It has generally performed quite well.
 
If it is possible, I desire to privatize Social Security by phasing it out over a period of 20 or 30 years. I don't have the stats to make the case one way or the other as to how to do the transition, but I would think that a plan would be possible. I would then have people invest in the stock market. The longterm return on the money has always been better than Social Security. The funds would need to be set up like the 401k program so that one cannot remove funds until they are close to retirement.

I realize that many are skiddish about the stock market. I would have the investments be in mutual funds and be diversified on type of funds and multiple fund companies to better protect the investor. Dollar cost averaging will allow people to have a tidy retirement fund if they start at 16 and go until 65 or whenever they feel they can retire. When I had my 401ks active prior to retirement, I loved it when the market went down. I know that when the market went down, I was going to earn more shares and when the market rose, those additional shares meant a nice growth for the fund.

If one has tens or hundreds of thousands of dollars left when one dies, the heirs should be able to keep 100% of the estate. As it is now, the government keeps the money; unless, you have a living spouse. If the spouse dies and the money is there, under Social Security, the heirs would get the $250 death benefit, but nothing else. Under my plan, all of the estate, including the retirement funds, belong to the heirs.

While the war on poverty did not reduce the poverty rates in any appreciable way, this should reduce those rates.

Unfortunately, many Americans look at the latest financial debacle as a horrible thing and it is if you are not working. However, for those working, the increase from the bottom to today has been staggering and investing monthly or bi-weekly would have netted a very good return.

I believe in empowering the individual to be self-sufficient.
 
I would echo much of what Oldreliable67 said in Message #19.

I want to note that the returns on equities would not be enormously greater than those under the current system and that arguments can be made that under various scenarios, they could wind up worse. Let's take a look at the last 30 years (1/1/1980-12/31/2010) as an example. Although the S&P 500 achieved annual average returns (stock price appreciation, stock splits, etc.) of 8.5%, the returns adjusted for inflation came to 4.8% per year. Management fees would slice those returns to some extent. In contrast, if one invested in 30-year Treasuries, the nominal annual returns came to just under 7.8% per year. A similar approach with 10-Year treasuries came to 7.2%. Those nominal returns would yield real returns in the 3.5%-4.0% vicinity.

That gap does not take into account dynamic factors e.g., steady investment of payroll taxes would likely lead to greater short-term share price appreciation as investment inflows > investment outflows. However, as the number of shares outstanding would be larger, one could well see a dilutive impact on earnings per share (EPS), actual and expected. Over the longer-term, as demographic factors lead to outflows > inflows (until the nation's demographic structure stabilizes), equities could face a significant headwind.

Stocks are also riskier than equities according to the overwhelming body of empirical research. Hence, during the 1980s and 1990s, the S&P 500 rose at an annual average rate of 13.9% vs. the average annual increase in nominal GDP of 6.6%. Part of that rise was on account of the Technology Stocks bubble that developed in the closing years of the 1990s. In contrast, during the 2000s and into the 2010s (through 3/31/2011), nominal GDP has grown at just 4.0% per year. The S&P 500 has actuall fallen at average annual rate of just under 1%.

Finally, one should also bear in mind that risk perceptions concerning Treasuries could shift in a more adverse direction down the road. Such an outcome would be most likely in the absence of a credible fiscal consolidation strategy for the medium-term and beyond. Increased risk premia associated with Treasuries would also lead to elevated costs of capital for the private sector given the market linkages (currency, financial sector, tax policy, monetary policy, etc.).

Such an outcome would not be favorable for Treasuries or equities, if it plays out. For example, let's assume that the federal government seeks a "soft" or "partial default" via inflation, as many governments faced with increasingly unsustainable debt levels have attempted. The inflationary 1970s provides a cautionary tale. Equities did not fare well during that period of elevated inflation. The S&P 500 increased at a nominal 4.0% annual rate. However, once inflation was considered, the S&P 500 fell at an annual rate of nearly 2.7% per year. In an extreme case where an actual debt crisis loomed, the impact on equities would be much worse. The dramatic contraction of Greek equity prices (about 40% in the past year and around 70% since 2008) demonstrates the reality that equities would not be immune from the consequences of rapidly rising risk premia associated with an unsustainable fiscal strategy. Therefore, whether Social Security funds were invested in Treasuries or equities, a liquidity challenge would likely confront retirees. Even Overseas investments would not be immune given linkages between the U.S. and global economies.

In the end, I support a degree of greater investment choice when it comes to Social Security funds. However, one should be cognizant that such a move might entail greater risk per dollar of return depending on how one's portfolio were constructed. That approach would not allow retirees to avoid the impact of the federal government's fiscal challenges. It would not provide a "silver bullet" for addressing the actuarial challenges facing the Social Security Fund in particular and the federal government in general. Those challenges can only be addressed through structural reforms and successful fiscal consolidation, challenges that would grow more difficult the longer those reforms are delayed.
 
Other issues would be management fees, a well run government SS system with the ability to invest in things other then low interest government bonds would have low management fees, and be able to cover a wide variety of investments other then mutual funds or ETF's


The Canadian version of SS (CPP) is run this way and has made investments in a wide variety of investments, from real estate, equities to LBO. It has generally performed quite well.

If the rate of return is higher, then management fees wouldn't be that big of a deal, in comparison.
 
I would echo much of what Oldreliable67 said in Message #19.

I want to note that the returns on equities would not be enormously greater than those under the current system and that arguments can be made that under various scenarios, they could wind up worse. Let's take a look at the last 30 years (1/1/1980-12/31/2010) as an example. Although the S&P 500 achieved annual average returns (stock price appreciation, stock splits, etc.) of 8.5%, the returns adjusted for inflation came to 4.8% per year. Management fees would slice those returns to some extent. In contrast, if one invested in 30-year Treasuries, the nominal annual returns came to just under 7.8% per year. A similar approach with 10-Year treasuries came to 7.2%. Those nominal returns would yield real returns in the 3.5%-4.0% vicinity.

That gap does not take into account dynamic factors e.g., steady investment of payroll taxes would likely lead to greater short-term share price appreciation as investment inflows > investment outflows. However, as the number of shares outstanding would be larger, one could well see a dilutive impact on earnings per share (EPS), actual and expected. Over the longer-term, as demographic factors lead to outflows > inflows (until the nation's demographic structure stabilizes), equities could face a significant headwind.

Stocks are also riskier than equities according to the overwhelming body of empirical research. Hence, during the 1980s and 1990s, the S&P 500 rose at an annual average rate of 13.9% vs. the average annual increase in nominal GDP of 6.6%. Part of that rise was on account of the Technology Stocks bubble that developed in the closing years of the 1990s. In contrast, during the 2000s and into the 2010s (through 3/31/2011), nominal GDP has grown at just 4.0% per year. The S&P 500 has actuall fallen at average annual rate of just under 1%.

Finally, one should also bear in mind that risk perceptions concerning Treasuries could shift in a more adverse direction down the road. Such an outcome would be most likely in the absence of a credible fiscal consolidation strategy for the medium-term and beyond. Increased risk premia associated with Treasuries would also lead to elevated costs of capital for the private sector given the market linkages (currency, financial sector, tax policy, monetary policy, etc.).

Such an outcome would not be favorable for Treasuries or equities, if it plays out. For example, let's assume that the federal government seeks a "soft" or "partial default" via inflation, as many governments faced with increasingly unsustainable debt levels have attempted. The inflationary 1970s provides a cautionary tale. Equities did not fare well during that period of elevated inflation. The S&P 500 increased at a nominal 4.0% annual rate. However, once inflation was considered, the S&P 500 fell at an annual rate of nearly 2.7% per year. In an extreme case where an actual debt crisis loomed, the impact on equities would be much worse. The dramatic contraction of Greek equity prices (about 40% in the past year and around 70% since 2008) demonstrates the reality that equities would not be immune from the consequences of rapidly rising risk premia associated with an unsustainable fiscal strategy. Therefore, whether Social Security funds were invested in Treasuries or equities, a liquidity challenge would likely confront retirees. Even Overseas investments would not be immune given linkages between the U.S. and global economies.

In the end, I support a degree of greater investment choice when it comes to Social Security funds. However, one should be cognizant that such a move might entail greater risk per dollar of return depending on how one's portfolio were constructed. That approach would not allow retirees to avoid the impact of the federal government's fiscal challenges. It would not provide a "silver bullet" for addressing the actuarial challenges facing the Social Security Fund in particular and the federal government in general. Those challenges can only be addressed through structural reforms and successful fiscal consolidation, challenges that would grow more difficult the longer those reforms are delayed.

We disagree. If I was not already retired, I would ask if you would allow me and my family the choice of taking that risk? Also, I retired in December of 2009. The market had started to rebound, but it is now over 20% higher now than it was then. My retirement funds are locked in with guaranteed payouts for the rest of our lives. Under my plan, you would not have paid for my Social Security, which you should not have had to do. So, since you did, I think I will plan my next international trip. Thanks!
 
We disagree. If I was not already retired, I would ask if you would allow me and my family the choice of taking that risk?

As noted in my closing paragraph, I support a degree of greater investment choice when it comes to Social Security funds. However, people should understand that such a move would not necessarily increase long-term returns nor lead to lower risk. Much would depend on how one's portfolio is constructed. Moreover, such a move would not insulate people from the consequences of an unsustainable fiscal policy.
 
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