COUNTERCOLUMN: All Your Bias Are Belong to Us

Brad DeLong is hosting a promising discussion here.

Whether we go to individual, self-directed accounts or not (I believe we should not, because that would just increase the variability of returns without any compensating increase in aggregate returns, and we'd wind up bailing out the foolish investors, anyway), we can expect the aggregate return in the equity portion to run approximately equal to the growth rate in the economy, plus dividends.

The question is, will we see a greater return in equities and private debt than we will see in the unmarketable treasuries currently held by the Social Security system?

I think the answer is clear: we will see greater returns, in the long run. Private debt commands higher yields than treasury debt almost by definition, thanks to the risk premium on any given security--a risk premium not an issue with treasuries.

Some criticisms are already nonstarters:

1.) Some people will burn through their nest eggs and we'd have to bail them out.

--The burn rate can easily be made irrelevant by annuitizing some or all of the nest egg. The downside is that the annuitized portion cannot be passed on to heirs. But the underlying objection is easily dealt with.

2.) Some people will go hog wild with brokerage accounts. Remember the Internet bubble?

--There's no reason we need to offer a brokerage window. They were a disaster in the 401(k) world. Why would we repeat the same mistake here? I suggest a series of "lifestyle funds," managed for a given age cohort. If there's a self-directed element to it, you could enable people to choose between aggressive, moderate, and conservative portfolios within the lifestyle framework, but that's about as far as I'd go.

3.) The Social Security funds would quickly bid up the price of securities, lowering the eventual expected returns, and therefore counterproductive.

--No. This would be true for any given individual security. But in the long run, the expected returns measured over decades, will be approximately equal to the real GDP growth rate, plus dividends, regardless.

Even if we accept this criticism as true, then the effect would be to keep a lid on interest rates as the price of private sector bonds is bid up by the demand--thus making the dream of home ownership more affordable.

The other issue, though I do not see this as a critique, is that a few years into such a plan the US government would effectively have nationalized its way to noticeable minority stakes in all publicly traded US businesses. Sure, those stakes would be held in "personal accounts" but that would be even more accounting fiction than the current trust fund.

As a crazy leftist, I wouldn't much mind for a well-run federal government to have a seat on every board of directors in the country. However, though I doubt George Bush wants that, that's where his plan is headed.

Just when you thought the command economy was dead, nationalization is back!

The temptation to intervene in the internal workings of companies, and to divest out of controversial industries du jure, would be powerful, and should in every case be resisted. The Federal government should be a passive investor. This is pretty much the case, though, with the Federal Thrift Savings plan already. If it's clear that any shares held by the SS system are nonvoting shares...or proxy vote rights were passed on directly to the pensioners, it shouldn't be too big a problem.

Splash, out

Jason