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May 12, 2005
The "Equity Market Risk" Canard
Alex Tabarrok notes that "the canary is dead," that is, that United Airlines' problems in fulfilling its pension promises foreshadow those of the federal government:
A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.Kinda makes you go hmmm...doesn't it?
(SocialSecurityChoice also picked up this link.) But Matt Yglesias disagrees, and one of his commenters backs him up as follows:
bingo -- you don't want the performance of all three legs of the retirement stool (to use the old metaphor) to be correlated with each other. But if DB plans are invested in equities (or just underfunded), private savings/ 401k type plans are invested in equities, and privatized social security is invested in equities, well, you have a lot of equity market risk.
Of course, 401(k)'s, DB pension funds, and privatized social security would (presumably) all be invested in bonds and other assets, not just equity. But the big mistake here is to see the equity market investments as riskier than government-"guaranteed" benefit. As I've argued before in my essays "Land and Sea" and "Every Fiber of Senator Boxer's Being Won't Guarantee Your Social Security Check", the government can't guarantee your Social Security check because its personnel, as well as voters' views, keep changing.
The stock market is not risky if you're investing for the long run, which you are if you're a worker in your 20s, 30s, 40s, or maybe even early 50s who is saving for retirement. Over long periods of time, it always gains value. (If you're in your late 50s, you might want to start moving your money into bonds.)
By contrast, we all saw that George Bush's smirk in the first debate almost threw the election to Kerry. You'd be a fool to predict what strange twists politics may or may not take between now and 2043, when I'll be 65. You don't want your retirement benefit to depend on them.
It sounds crazy against the backdrop of recent hysterias, but it's true: Private accounts are the only way to make "Social Security" anything but a euphemism.
Posted by Good Samaritan at May 12, 2005 04:06 PM
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