All week I've been writing about restructuring Social Security to include individually managed private accounts. There has been a lot of great discussion about it on the MetaMarkets message boards, and I've also gotten quite a few e-mails about it. Today I'm going to respond to several questions and critiques that have come up.
Aren't most people too unsophisticated to manage a private account?
This is a valid concern, but there are simple solutions that have worked well for over 20 years with 401(k) plans, and they could easily be applied here. First, rudimentary investment education can easily be supplied - mastering a few cookie-cutter basics is enough to equip a newbie to avoid 90 percent of the pitfalls. Second, professional advice can be provided through individually tailored services, or by use of collective investment vehicles such as mutual funds. And third, the number of investment choices permitted in the private accounts can be constrained to rule out the really risky stuff.
And as I've said before, you'd have to practically try on purpose to have bad long-term results to get outcomes that are as awful as the rates of return produced right now by the existing Social Security system. And those already-awful returns are only going to get worse when taxes are inevitably raised and benefits are inevitably cut.
OK, but what if despite all that some people blow it? Wouldn't the government have to step in and bail them out?
Well, no. Government doesn't step in today to bail people out who arrange their affairs in such a way that their meager Social Security income isn't enough to live on.
But wouldn't it be better to keep risk of investment loss out of the picture entirely? Whatever may be wrong with the existing system, at least the returns are guaranteed.
The returns of the existing system - poor as they are - are not by any means guaranteed. They can be reduced, delayed, taxed or discontinued altogether at any time by the whim of Congress. Social Security participants have no property right or contractual right in their account - in fact, they have no "account" at all in the usual sense. It's just a welfare program, like food stamps or subsidies to farmers for not growing potatoes.
The financial services industry doesn't want private accounts, because there would be so many of them - and they'd be so small - that it wouldn't be profitable to service them.
The financial services industry put itself through a decade of competitive paroxysms to win 401(k) business when it was all up for grabs during the 1980s and early 1990s. It is now very well equipped to handle lots of small accounts. If it were not, why would American firms go all the way to Chile to service private retirement accounts there - in a country that is far smaller and far poorer?
Private accounts are just a scam by the financial services industry, designed to drum up business.
Well, obviously this objection isn't raised by the same people who raised the previous one!
Shouldn't private accounts be modeled on the existing Federal Employee Retirement System (FERS) model?
Many people have held up the 401(k)-like plan available to all federal workers as an ideal private-account system. I know that system well, by the way - FERS used to be my biggest customer when I was with Barclays Global Investors, which managed most of the investments in the plan.
The FERS program is deliciously simple. Employees pay part of their salary into a private account, and the employer (Uncle Sam, in this case) matches it with a contribution of its own. The accounts can be invested in an S&P 500 Index fund, a Lehman Aggregate Bond Index fund, or a money market fund.
It's so simple, all the participants seem to be able to understand it. The funds all have astonishingly low fees because they are so big and so simple. And the bookkeeping is all administered by
