Being Street Smart January 07/05

by Sy Harding
January 07/05

SOCIAL SECURITY IS WASHINGTON’S RESPONSIBILITY!

Here they go again. Washington wants to get out from under the mess they’ve made of social security by turning responsibility for it over to the workers it was designed to help.

Much as private corporations have been doing, in shifting ‘guaranteed-payment’ pension plans to 401K plans, Washington wants to convert the ‘guaranteed-payment’ Social Security system to a ‘defined-contribution’ plan. It wants to start shifting Social Security taxes into individual retirement accounts, making what happens to the assets by the time workers retire each worker’s responsibility. Such conversions have certainly relieved large corporations of having to come up with the money to pay pensions to their worker’s upon retirement. But government should not be allowed to so easily duck out of its responsibilities and promises.

It seems that each time after the stock market has been in an impressive bull market, making investing look easy, Washington starts talking up this idea about how neat it would be to just let workers invest their social security taxes in the stock market themselves.

The idea is dumb, and that it might get through this time is even dumber.
Understandably Wall Street wants it, in fact salivates over the thought of it to the point of spending millions lobbying Congress for its passage.

Some individual investors probably like the idea, thinking it’s a better place to get more money for the market than refinancing their homes again, or buying on margin those penny stocks and high-flyers they prefer to bet on.

And for investors who are successful in managing their own investments, or have good money managers who do it for them, it would be a plus.
But it would be totally unsuitable and unfair for the majority of workers, those not able to save or invest, the very ones for whom social security was designed as a safety net.

I’m not worried about those millions who work in state or federal government jobs or for large companies that also provide pension plans (or 401Ks), or those who have good jobs and careers that provide extra discretionary income that can be saved or invested for retirement. At retirement Social Security is just a supplement for those fortunate folks.

I’m talking about the many millions of Joe and Betty Mainstreets who work for themselves, or for employers that do not provide pension plans, who have no knowledge of investing, who will suddenly have the responsibility of investing their social security safety net for themselves.

Joe will continue to spend his day pounding nails at his construction job, or selling cars for long and tiring hours. Then, rather than going home to watch TV with his family, or go out with the guys for a beer, he’ll read the Wall Street Journal, read the prospectus of a few mutual funds, and check out the prospects for Home Depot versus Lowes. Sure he will.

But you say, he won’t have to do that, or know anything about investing to take on managing his own Social Security. It will be set up so Wall Street does that for him.
Of course it will. And that’s a good idea?

Has Washington not noticed the major scandals that its own investigations revealed in just the last three years, every one of which involved the various ways that small investors were misled, overcharged, and taken advantage of by brokerage firms, mutual funds, etc.?

You think the loopholes have been closed and Wall Street has gotten religion? Those types of scandals shocked the country after every stock market plunge of the last 100 years in which investors lost large amounts of money and investigations were launched to find out why. Laws were revised to prevent recurrence, but every few years new scandals erupted anyway. Wall Street firms are expert at finding new loopholes.

So, what should be done about social security?
I actually think that investing social security taxes in stocks and bonds is a good idea, and should have been the system since social security was first introduced. It would not be in such trouble today.
But the responsibility for investing it should not be up to each Joe Mainstreet, or the Wall Street firm that gets its hooks into him. Individuals already have enough government sponsored opportunities to invest in the stock market on their own, through tax-deferred plans like IRAs and 401Ks. And those who are successful with them will indeed have comfortable retirements.

But Social Security is different. It is a government provided safety net for those who don’t make it with all the other options that are already available. And it should remain the government’s responsibility.
It should be invested in stocks and bonds in the form of a large government-owned investment fund, not as millions of small accounts. Not only would expenses, a very important consideration in investing, be smaller, but efficiency would be greater, as would the ability to get the best deals. If investing is so easy that Congress believes untrained individuals managing millions of separate accounts can do it, or can do so with the help of financial advisors they can use, then it should be a snap for professional managers that the government could hire to make the investment decisions. But of course, then if it blew up in their faces Washington could not blame the workers for having made mistakes.

Maybe I’m worried about this for no reason. I worried about it in the late 1990s when the Clinton Administration had the same idea. But the severe bear market of 2000-2002 came along in which the Nasdaq, the favorite playing field of small investors, lost 77% of its value. That ended all talk of putting social security into individual stock market accounts.

Until now, when after the impressive new bull market that began in 2002, Congress has again become excited about the stock market. Perhaps they are doing so with the same poor timing they demonstrated in 1999, and the idea will again die a natural death, when another bear market demonstrates again why it is such a bad idea (to expect inexperienced young workers to navigate the many such implosions they would encounter before reaching retirement age).

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.