Misgivings about Social Security Reform – Part 1

March 11, 2005

I have listened to George Bush promoting his social security plan. I have listened long, and hard, with an open mind. And every time I listen, over the flood of rhetoric and tales of wonderful possible outcomes, I hear a little voice in the back of my mind whisper hogwash!

Because my mother told me, my father told me, and forty years of financial advisers have told me, “if it sounds too good to be true, it probably is.” It seems that the reason this is only being touted for the young is that most of them don't remember the numerous times the stock market has gone down, taking equity and income with it. Don't remember the crash of '29, don't remember the 1000 point drop of 1978, don't remember that the NASDAQ, now around 2000, was around 5000 six years ago. And “those who fail to learn from history are bound to repeat it.”

The President tells us that historically after any drop in the stock market the recovery has taken no more than ten years, and that investments in the market have done better than savings in a bank. These things are true, and if you don't look too closely they have the ring of sound advice. But consider that most people don't want to plan their retirement and find that they have to delay by a decade because the market is down, and that what caused recovery from the crash of 1929 was the start of WWII. Perhaps the war in Iraq is just an effort to get the economy rolling again.

Think about why the Social Security Trust Fund wasn't invested in the market in the first place. First, if the SSTF was invested in the market, and the market went down, the money might not be available when it was needed. That's just as true, if not more so, for the individual investor.

Second, even the best stocks sometimes have a huge drop in value, and perhaps the companies even go out of business. Consider that both Enron and Worldcom were regarded as investment grade and dropped to a small fraction of their initial value. Look at AOL a decade ago and now. If people investing in the most highly regarded stocks can be fooled, how can the individual investor be secure? And consider that even when you pick a good stock it may drop based on no known reason. Recently Intel reported better than expected earnings for a quarter and raised projections for the rest of the year. The stock dropped about two percent.

“The government will provide safe choices,” says George Bush. What that means is that the individual investor won't even have the chance to pick his or her own stocks and bonds, but will be steered into “safe” investments. If the best financial experts in the country invest their own money in the Enrons of the world, can you trust anyone less skilled to do better. The phrase “I'm from the government and I'm here to help you” has become a standing joke!

Next time: the rest of the problems!