Misgivings about Social Security Reform - Part 2

March 21, 2005

I said that this time I would show you “the rest of the problem,” and indeed there are two major problems with the program as proposed. They are intrinsic to addressing the problem of people making bad investments on their own, and choosing having the government chose bad investments for them. I see (at least) three problems with government provided investment choices.

The first problem is corruption by bribery. The people making the decisions are human, and to put in place a system which assumes that the staff is beyond corruption is to ignore the lessons of forty centuries of recorded history. If a stock is “under performing,” as analysts say, I have a hard time believing that if someone stands to make tens of millions if a stock goes up they would not pay a few million to cause such a rise through purchase by the government funds, or that the analysts making the choices would always be beyond such corruption.

The second problem is corruption by influence. This could work in several ways, both to the government's advantage. The first is the path of insider trading, in which the stock of a given company is purchased by the SSTF just before a government contract is awarded and the stock goes up. The other side of that coin is that, if a stock heavily held by the SSTF is declining in value, the government may wish to protect the value by awarding a contract which preserves the value of the stock, or at least the price of the stock, which is another thing entirely.

The third problem is price pressure, which at least is not intentional. When a stock is included in the SSTF portfolio, it creates a demand pressure on the stock, which inevitable rises in price. Unlike the previous problems, this one is purely without bad intentions, it's just an unavoidable result of the market system, which raises prices as supply decreases, until demand either declines due to price, or is satisfied. And unlike the first two problems which in theory could be solved by assiduous oversight and scrupulous honesty, this problem is an effect of how the market works, controlled by the aspirations of the individual investors and independent (of the government) funds.

The forth problem is that this has been tried and didn't work as intended. The government has long allowed tax deferred plans, such as Keough and 401K, and tax exempt plans such as Roth IRA. Several of these are allowed to be self-directed, and allow the individual investor to “take control of their own retirement” as promised in the new plan. The sad truth is that most people (a) don't take advantage of these, and (b) don't get very good results.

Are there exceptions? You bet! But to bet the national retirement system on the results of the lucky, talented, and hard working is impractical, since the average worker lacks training and understanding in market economics, can't make investing a full time job, and would have won the lottery if he or she were exceptionally lucky. Most people can't afford to gamble with their retirement, and any investment which has the possibility of losing your money is a gamble.

Next time I will share my thoughts on things which might be done which would improve the SSTF situation.