Friday, September 19, 2008

Social Security Privatization 
Watch out for libtard attempts to hang McCain's support for a private account option for Social Security around his neck like an albatross. Actually, they're already doing it...and the financial illiterates in the media are buying into it.

But verily I say unto you: the lower equity prices go, the more sense it makes to allow workers to route their earnings toward private accounts.

It's the paradox of public stupidity: People make decisions by looking in the rear view mirror. The more attractive equities become, and the lower P/E ratios become and the higher dividends become, the more difficult it will be to sell the public on private accounts. The unwashed masses only want to invest in equities at the worst times, AFTER stocks have been soaring. And they want to get out of stocks only AFTER the market lurches downwards.

But remember folks, we are looking at dollar cost averaging contributions over a period of decades. Equity prices at any given time is simply statistical noise. Look, the market ended UP this week, anyway!

What's really important is what kind of earnings can you get per dollar, and how stable and reliable that stream of earnings becomes. There is nothing else that can support a reliable pension, in the long run...and that is equally true, regardless of whether short-term price volatility has ZERO EFFECT on the long-term earnings of any given security. The only thing price volatility can do is affect your expected return, which is a function of expected earnings and current price. Further, the longer the time horizon, the smaller the effect of the current price.

Now look at things the other way round: As people flee to safety and drive down yields on bonds...especially treasury securities, that will ALSO have the neccessary effect of depressing the internal rate of return of Social Security contributions.

So the market events of the last couple of weeks are actually an argument FOR some form of privatization, not an argument against it. The worse things look, and the further down investors drive treasury yields as they run screaming to safety, the lower the expected returns on the bonds held in the Social Security Administration portfolio. Should the rate of inflation outstrip the yield, and we have negative real returns on Social Security, the difference will have to be made up out of the general fund, anyway. We are still beholden to make up COLA adjustments. If Social Security is limited to a bond portfolio, AND we remain in an extremely low interest rate environment, it gets very ugly very fast for the Social Security Portfolio.

Splash, out


Labels: , , , ,

Comments: Post a Comment

This page is powered by Blogger. Isn't yours?

Site Meter

Prev | List | Random | Next
Powered by RingSurf!

Prev | List | Random | Next
Powered by RingSurf!