With the roaring Bull going past ten years now it was only a matter of time before one once again beheld the siren song of the Social Security privatization nabobs.
Sure enough, a definite snake oil pair (Jeff Yass and Stephen Moore) recently emerged with their misinformational op-ed 'Conquer Inequality With Private Social Security Accounts' (WSJ, July 26, p. A15)
As usual, and ever since this misbegotten idea was first touted by Gee Dumbya Bush, the two current hucksters promise it will relieve or solve all current and possible future financial ills - and there's no doubt their pitch is to the Millennial demographic. After all, it is this group which has been told over and over that their wages are subject to FICA taxes to help support those "greedy Boomers". So why not have their own money in their own accounts? Well, plenty of reasons.
The biggest lie is that accepting such a scheme will ensure that "workers will become owners". Nothing is further from the truth. You will no more "own" your money than you own your 401 (k), meaning you cannot do whatever the hell you want with it without penalties. There will inevitably be a Wall Street outfit that controls your funds so you are only under an illusion of ownership.
Just as 401(k)s have misled millions into believing they are really finance mavens and savvy investors, so Messrs. Moore and Yass seek to have you believe just having a private Social Security account will pave the way to wealth. As they put it:
"Each individual account (would take 10 % of payroll taxes) be invested in a low fee index fund of roughly two thirds stocks and one third bonds and would mature at the federal retirement age. This way every working American - from the minimum wage waiter to the truck driver to the store manager- would become a genuine owner building real wealth for himself and his family with each paycheck."
Not so fast there, buckeroos! First, as the authors of The Great 401k Hoax (Wlliam Wolman and Anne Colamosca) have observed: 401ks were never set up to be investment vehicles, but savings vehicles! Ditto for Social Security monies. They were never ever intended to be paycheck "seed corn" to buy equities or gamble in Maul Street's casino but to supplement pensions in the retirement phase. Financial specialist Steve Rattner, who I daresay has more educational heft than the two WSJ clowns, has put it best: "Just as I would not be so kunckleheaded as to perform my own surgeries, I would not be so addled as to believe I can do my own investments. Not unless you are a skilled financial expert or planner:." And from the annals of most Americans' saving experience and use of money 9 of 10 are not - finance mavens that is. Hence, they have no more business managing their Social Security FICA monies in investments, than they do for 401(k)s. Certainly not putting money in stocks in any 'index funds" - or more fully managed funds. Look, you can lose your ass with a bear market just as easily in the first as in the second.
Let's explore this aspect. Investment and finance specialist William J. Bernstein in a MONEY magazine interview in 2012 went through the biggest retirement investing mistakes - most of which violate life cycle investment principles. (MONEY, Sept., 2012, p. 97). His rule of thumb which thorough research has validated is that the ordinary person needs "20 to 25 times the residual living expenses - the yearly shortfall you have to make up after Social Security and any pension".
So, let's say you do the math and find out on retirement - say at 67 - you will need $3,500 in monthly living expenses, to pay utility bills, meds, groceries, Medicare supplement premiums, etc. Then if you know Social Security will pay you $2,000 a month that leaves $1,500 to cover with savings, or safe investments. (Bernstein advises safe assets such as U.S. Treasury Inflation Protected Securities) 12 times that is 12 x $1,500 = $18,000 per year. And 20 times that 'magic number' is $360,000. This is the yearly shortfall to make up if, say at age 67, you project the probability of living 20 more years. The increased (5) factor, e.g. the yearly amt. by 25, provides a greater safety margin. Hence, the more advisable saving total outside of Social Security is $450,000.
Bernstein is also adamant that the older the worker is the greater the need to pull back from equities. The reason for that? The closer you are to retirement, the more difficult it will be to make up the lost earnings - say if you find yourselves in a prolonged bear market, or a major stock crash. Yass and Moore take no account of this in their blather about "owning" private accounts. The outcome if this is not taken into account? "There's a significant chance you're going to be eating Alpo when you're 85." according to Bernstein.
WSJ letter writer Don B. Stuart, responding to the cockeyed nonsense of Moore and Yass (p. A14 yesterday) noted a similar concern:
"Is this plan only for those with 40-plus years remaining? What about those with only a decade left? Their risk may be too high."
Which was exactly Bernstein's point and why the individual person's "life cycle" horizon must be reckoned in, else it's a pile of foolishness.
Do you really think Yass and Moore give a hoot if you're eating Alpo daily at 85? Of course not. They're merely interested in snatching FICA taxes to stuff into the maw of Maul Street to support a stock market investment scheme that has absolutely no assurance of avoiding losses. Interestingly, the WSJ authors dodge who will compensate you if a bear market comes along and you lose half of your invested money. (Let's also bear in mind you'll need a 100 percent gain to get to breakeven after a 50 % loss.)
Letter writer Stuart also points out, reinforcing Steve Rattner's earlier observation about people not doing their own surgery either:
"Yes, wealth is created saving and investing over a long period of time. But this is hard for individuals on their own."
Especially in the stock investment sphere! Speaking for myself, I self-studied finance, stocks, mutual funds and bonds for over five years before investing in Janus Worldwide Fund once we left Barbados and moved to the U.S. in 1992. This was in a 401(k) provided by the (then) radiotherapy software corporation for which I was a technical writer and regulatory specialist. The insight provided by education paid off and this Janus fund racked up huge returns for the time I was in it (pulled out in 1996, before leaving the company) and as fate would have it, before the Fund earnings tanked.
The point is not everyone in a 401(k) will have the time or energy to study investment strategy, the ins and outs of mutual funds and their expense ratios, whether 'front loaded' or 'back loaded', and the nature of P/E ratios. Hence, they won't be able to make an informed decision - as Mr. Bernstein puts it - "To know when to take the money off the table".
Again, this is why the 401(k) was designed as a savings vehicle, not an investment one, and neither is Social Security. Imagine, for example, if you're a truck driver at age 45 and could take the WSJ hucksters' advice of diverting your FICA taxes into a private account. What if a bear market or stock crash hits 5 years before you retire? Think you will escape that Alpo at age 85? Think again.
The value of Social Security is precisely because it provides a stable income stream that will not go down the next month or the one after. Retirees can make financial decisions precisely because they know what this income flow will be. Indeed, a second WSJ writer (Robert J. Sartorius, an FCA) also takes issues with the authors noting:
"The 10 percent to which Messrs. Yass and Moore refer is simply not available to be saved and invested because Social Security is currently funded on a 'pay as you go' basis."
The writer adds that in order to make a stable transition to the private accounts scheme invoked by Yass and Moore, would require "an additional federal debt approximating $800 billion per year."
This would be needed "to pay current benefits no longer covered by the 10 percent of payroll being diverted."
Interestingly, this is a critical aspect - the addition to the deficit - most of the snake oil salesmen ignore. One therefore wonders if they just expect current retirees in the existing system to just suck salt....or eat Alpo.
In ending, may I also remind people, that if they DO have 401(k) money in equities they are referred to as "dumb order flow" and "chickens to be plucked" by the Maul Street wizards, quants and casino operators? (Referenced in a WSJ piece from 2010). Like the 'Wizard' in the land of Oz, these folks never want you to see what actually goes on behind their curtains, including the high frequency trading (done by special algorithms) which triggered the "flash crash" of May 6, 2010.
How influential is flash or high frequency trading? According to a The Wall Street Journal article from 9 years ago: ('Fast Traders Face Off with Big Investors over ‘Gaming’, June 30, 2010, p. C1) it accounted for two-thirds of total stock market volume. All other things being equal, that meant unless one had access to a flash trade system or algorithm himself, he had a 2 in 3 chance of being victimized by flash trade. That probability is even higher now given the much greater extent to which HFT is used.
Yass and Moore mention none of this, nada, they only expect the semi-educated and gullible to take their word that they have the ticket to transcending inequality.
Don't believe it for a nanosecond!
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