October 10, 2010

More On Toomey

There's a follow-up to this post. It refers back to
this article at the Scranton Times-Tribune where Congressman Pat Toomey was defending his plans to privatize social security (if only partially).

Wonkroom has done some work on this section where Congressman Wall Street explains his confidence in, well, Wall Street :
"I would argue that you don't really have to worry about a fluctuation in the stock market because this is a 45-year period of time, and you are gradually transitioning out of stocks as you get older and get closer to the point where you need to draw on those funds," he said.

The stock market would rise and fall, but over 45 years an investor from a private account would end up ahead, he said.

"If you don't believe in that, then you're giving up on the American economy," he said. "I mean, there's never been a 20-year period in our history where we haven't had a positive performance in the stock market, much less a 40-year period. If we don't have growth over a 40-year period, we got serious problems."
And now to the Wonkroom:
Toomey argued that “there’s never been a 20-year period in our history where we haven’t had a positive performance in the stock market, much less a 40-year period,” so anyone subject to his scheme wouldn’t have to worry. However, as Center for American Progress economist Christian Weller noted in 2005 (before the financial meltdown of 2008), there have been plenty of sluggish periods in the U.S. stock market, and accounts need to earn above and beyond the rate of inflation just to stay in the black
Weller's piece from 2005 can be found here. Weller stated back then that those private accounts would have to earn at least 3 percent above inflation in order for there to be any net gains on those accounts. He went on:
Even Wall Street agrees that on average, people will have a hard time meeting this target.
Meanwhile, of course, the money managers handling all that extra cash will still be collecting their fees.

So while it would be difficult, to say the least, for workers to get a net gain on the money in their private accounts, Wall Street still makes out very nicely indeed.

Toomey gets it wrong on Social Security, But can we see what a good deal this is for Wall Street?

Congressman Wall Street - wrong on Social Security.

1 comment:

EdHeath said...

Reading over Weller's essay, I find points I agree with and bits I disagree with on a theoretical level, but the conclusion that Social Security privatization is a bad idea is pretty solid.

The potential for problems lie in the details of the program. These are going to be relatively small accounts compared to those from wealthier clients, so the safest course for them would be to aggregate them into big diversified market funds, with balances of (more aggressive) stocks and (more conservative but lower performing) bonds. I can see a 30 year program where for the first ten years the first ten years the stock to bond ratio was 75 to 25, then 50/50 and for the last ten years 25% stock to 75% bond. Or some slightly more complicated variation, but with the idea that changes are made in a programmatic fashion, to be very safe and to hold broker's fees down on these rather small accounts.

The thing is that a dedicated fraction of savers will think they are smarter and want to directly buy a specific stock, or at least make changes to their accounts at their own pace. But in those cases, not only could the saver lose his or her money if a stock goes south, but a much larger portion of their return will go to transaction fees.

This is not to mention the possibility of of a 1987 or 2008 drop in the stock market, that could wipe out a specific group of private account saver. Would the government step in and simply give money to those savers who were about to retire?

So although Toomey could sort of be applauded for his honesty (sort of), not only would his privatization plan create billions or more of a debt shouldered by our children in the future that will be be transfered to Wall Street now, but Toomey would put the government in the position of allowing savers with an unknown amount of experience to make risky choices in the stock market. Whether the government decides to bail out those private account investors who make bad decisions or simply faces the wave of lawsuits that will occur, it will be a colossal waste of money. The only people who will benefit: Wall Street traders.