How to Save Social Security, take III!
I just got this comment by a retired actuary Andy Lang at my main blog. He writes about how the combination of the entry age normal actuarial cost method and a fire wall around the SSTF plus professional investing in the stock market would save Social Security.
I wrote back to him the following.
I think your ideas and mine can be complementary. I have a problem with basing the investing on "professional experts", inasmuch as there are (1) considerable problems with the potential for corruption, (2)simply too much variety across the wide range of stocks invested in the NYSE to compare and pick stocks based on qualitative factors,(3)Stocks aren't like probability distributions, they are subject to booms and busts due to psychological factors, including future expectations.
My approach would be a conservative strategy that would still improve the return, hedge well against a general downturn, and remove the potential for corruption by basing its holdings on relatively simple and replicable statistics.
I think it is compatible with having a defined-benefit pension entry age normal actuarial cost method. It would also maybe help during the imminent retirement wave of baby-boomers if we let some of the would-be illegal immigrants as guest workers continue to pay into Social Security and also receive the long-term benefits from US Mutual.
dlw
Why do you think Social Security needs saving?
Note in advance: I don't necessarily or automatically dismiss the arguments of those who think that the SSTF might benefit from taking a look at the "equity premium puzzle."
July 8, 2006 3:02 PM | Reply | Permalink
My apologies I posted my reply here. I know that SS is not a complete train wreck, but I think it could still use reforms and would also like to make it so that illegal immigrants, who currently pay into Social Security, could become guest workers who would continue paying into Social Security and be able to withdraw from it eventually.
I think basic human dignity mandates that we not rely on taking advantage of illegal immigrants to save Social Security.
dlw
A blog-activist dedicated to the reduction of the faith-based political acrimony in the United States of America so as to make our political system more democratic and just and to improve our witness to the rest of the world.
July 8, 2006 3:30 PM | Reply | Permalink
Because the best defense is a good offense and the SS can be improved upon so more people can get a better guaranteed return on their savings with it. I also think that my plan would perform a critical public service of reducing the volatility of the NYSE, making it easier for smaller to middle ranged firms to raise the capital they need in it and making it easier for individuals to invest in the stock market.
dlw
A blog-activist dedicated to the reduction of the faith-based political acrimony in the United States of America so as to make our political system more democratic and just and to improve our witness to the rest of the world.
July 8, 2006 3:26 PM | Reply | Permalink
Congratulations on your wisdom about professional money managers. It could end up even worse than you describe. If the appointment of managers becomes political then it would be easy for unethical managers to get in and plunder the accounts.
Can you show a spreadsheet for your plan? I'm actually far more pessimistic than you - I don't think any managers can provide a good return if the general retirement system for the US (or any country with the demographics of the US) is based on investing in financial markets. Look at any investment at all. If everybody invests in the same thing then the price of that thing climbs purely because of that investing and stays high only until some begin to remove their money from that investment. Then the price falls. It's the same for beanie babies, mutual funds, Microsoft stock, commodities, real estate. The personal accounts are the true Ponzi scheme.
July 9, 2006 8:42 AM | Reply | Permalink
That's why I think all the holdings would need to be based on an algorithm that uses publicly available data and is easily replicable.
I agree that we need long-range planning and vision for our development, but companies can do that and US Mutual can pick stocks based on the effects of such planning/vision.
To an extent, US Mutual will succeed simply because of its economies of scale. But it will also be relatively widely diversified and stable in its holdings due to the nature of the algorithm used. It will also have a long-term commitment and so it will not be simply the source of more instability to the economy.
I am going to get NYSE weekly-return data, that I will transform into weekly log-return data and use to illustrate my idea...
dlw
A blog-activist dedicated to the reduction of the faith-based political acrimony in the United States of America so as to make our political system more democratic and just and to improve our witness to the rest of the world.
July 9, 2006 9:38 AM | Reply | Permalink