more on social security investment accounts, was Cutting Only Peanut Butter

[David Farber <dave () farber net>]

------ Forwarded Message
From: John Levine <johnl () iecc com>
Organization: I.E.C.C., Trumansburg NY USA
Date: Wed, 16 Feb 2005 03:16:33 +0000
To: <dave () farber net>
Cc: <robertslee () verizon net>
Subject: Re: [IP] social security investment accounts, was Cutting Only
Peanut Butter

> Not only do I agree with this article, but I also do not understand
> the millions of small private accounts.  IF a greater return is the
> only rationale for these absurdly small and expensive accounts, then
> the obvious solution is for the SS Trust Fund to take 2% of its funds
> and invest in the index funds or ETFs of various securities markets.

Well, you'll never last long as a White House political operative.

The point of the small accounts is political theater.  To some extent
they neutralize opposition since they can say that if you don't want
one, you don't have to have one.  And they give people the illusion of
control over "their" borrowed money.

Then there's the pesky details: according to White House interviews,
the private accounts are designed to be revenue neutral to the
government so they won't help close the alleged revenue gap.  Worse,
unless you accept faith-based arithmetic and believe that the majority
of people will get above average returns and that these accounts will
have no transaction costs, the majority of people who try them will
end off worse off than if they'd done nothing.  In other countries
like Chile, it's been politically unavoidable to bail out the people
whose accounts tanked at vast cost.  That would surely happen here as
well since the alternative is photogenic grandmas who vote living in
cardboard boxes.

You are of course correct that if you wanted to invest a trillion
dollars in the market, the most efficient way is to invest it as one
big fund.  Vanguard, for example, charges only 0.08% for their total
stock market index fund if you put in at least $10M.  A fund like
this, with its vast size and its highly predictable inflows and
outflows depending almost entirely on demographics rather than market
performance should be able to operate at more like 0.01% cost.  But
that still leaves the market risk and the economic distortions.

> Inevitably, regardless of whether there are millions of small
> accounts or just one large one, the unintended (or perhaps intended)
> result will be an expansion of the price earnings multiples of the
> markets into which this money is put.

I haven't seen any good economic analyses of the effect on both the
stock market and the rest of the economy of simultaneously borrowing a
trillion dollars as government bonds, force feeding that money back
into the stock market, then buying and selling on a demographically
determined schedule that everyone will know years in advance.  Has
anyone else?

Regards,
John Levine, johnl () taugh com, Taughannock Networks, Trumansburg NY
http://www.taugh.com


------ End of Forwarded Message


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