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Posted 12/20/2004
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Privatizing Social Security should scare you
The idea assumes anyone can invest successfully -- and threatens to destroy the safety net for which Social Security was originally created. Yet privatization is being spuriously packaged as 'reform.'
By Bill Fleckenstein
If Mr. Market was easy to understand, we'd all become rich. But notwithstanding his inscrutable ways, there are pundits aplenty offering their opinions to anyone who will listen. It's a problem for folks sifting through all these opinions, as they try to discover the ones that will make them better investors.
Meanwhile, successful investing will be an impossible goal for large numbers of Americans -- even as privatized Social Security is trotted out in the name of reform in the face of that reality.
There's no shortage of people who have opinions about the stock market and many other markets. Some are worth listening to, and some aren't. Sometimes it's hard to tell whether or not you should factor someone's opinion into your thinking. But oftentimes, it's clear.
If someone has consistently misunderstood the way the world works -- like Abby Joseph Cohen, Joe Battipaglia, and the rest of a long list of "new era" talking heads -- there's not much point in listening to them. But it's worth paying attention to the people who've consistently demonstrated that they understand the way the world works -- guys like Jim Rogers, Jim Grant and Marc Faber, to name just a few of a short list of people.
Set your junk-pundit filter to 'high'
This is not to say that any one person is always right or, more importantly, can always get the timing right. My point is that a tremendous number of opinions exist, and, given how easy it is to access those opinions (thanks to the ability to communicate via the Internet), this information overload can leave everyone in a daze. The trick is in distilling it down to people you want to pay attention to and ignoring the ones you know are clueless.
Readers of my daily Market Rap often ask my opinion of so and so, of whom I've never heard. Just because I've never heard of them doesn't mean they can't have a line of logic that's very useful and worthy of consideration. Conversely, just because someone's on Bubblevision doesn't mean that whatever they're saying is useful. Perhaps the fact that they're on Bubblevision means you should ignore them (though that notion might be just a little too clever).
The bottom line is that folks have to process all the useful information they can, then come to conclusions that make sense to them and that they can live with. It's not easy figuring out what's liable to happen next. That's why getting the price right when you pick a stock or some asset is so important. You'd like some margin of safety in the event that your view of what the future holds for the economy or a company is incorrect.
Bulls on the privatization bandwagon
As if successful investing isn't challenging enough, even for the well-informed, a potential plan to privatize Social Security would turn that responsibility over to novice investors across America. Privatizing Social Security is one of the bulls' new reasons for being bullish, as they envision mountains of money moving into the stock market.
Related news and commentary on MSN Money
I find it stunning that people behave as though there's actually money in the Social Security trust fund. As I stated in my column, "Heads up for pension heartache," the government spends the payroll-tax proceeds (and pays out current benefits) as part of its budget, then puts an IOU in the trust fund for future retirees.
Prior to changes resulting from the Social Security Reform Act of 1983, the system was on a pay-as-you-go basis, and it was headed for trouble. The government supposedly put Social Security on an actuarially sound footing: Money would be paid in and surpluses would accumulate, to be paid out later when the baby boomers started to retire. Now the baby boomers are approaching retirement, and there wont be enough money in the fund to deliver on past promises. So, now were talking about "reform."
There's only one problem. The bulls are acting as though Social Security is a giant individual retirement account or personal pension fund. It is not. The Social Security system was established to make sure that those people who found themselves mostly penniless had something to get by on. You may agree or disagree with the principle under which Social Security was established, but that's what it was supposed to do.
Social-Security.com
The present sugarplum plan dancing through the head of stock bulls is that everyone would be given their own money to invest and we'd all live happily ever after. But, if we go down that path, a disproportionately large segment of the population will probably be unsuccessful at investing and will wind up in the exact position that Social Security was supposed to prevent.
This is not to demean the average person's good intentions. It's just that we have seen what can happen in the several years since the dot-com mania blew up, and I think we'll see more problems prospectively. It's difficult to be a successful investor, even if you have a long-term horizon. (And, no, indexing is not the answer, either). Further, if you hold down one or two low-paying jobs and have to hustle to make payments and make ends meet, or a myriad other combinations like that, it's easy to see how you would have some difficulty devoting the necessary time to your investments."
Broken promises vs. a 'broken' system
The money that comes out of our paychecks for Social Security is a tax. That tax goes into the trust fund to help defuse the government's liability. Social Security is a giant liability of the government. It has promised to pay people a certain income stream at some point in the future. That will no longer be possible. So, when someone says Social Security is broke, it's not like it is broke today. What they mean is that it's going to be unable to meet its liabilities as presently construed, especially as more baby boomers retire.
A politically unacceptable but semi-intelligent solution would probably involve some form of means-testing -- if you dont need it, you dont get it. Obviously, people who've been financially successful do not need Social Security. Furthermore, I, for one, have always assumed that I would never see a penny from Social Security. It's been clear to me for decades that we'd end up where we are about to end up. I don't know why "not getting what you put in" is such an unconscionable outcome to people, but it appears to be.
Some people seem to believe that since they paid money into Social Security, they deserve their "fair" share. Well, let me ask you this: Most of you probably pay a lot of money in taxes. Do you get a "fair" return on your taxes? I thought so. Social Security is just another government program that won't work out as it was supposed to, but hey, that's life.
Pretending Social Security is an IRA is lunacy
Having said all that, there are lots of people in this country who, for one reason or another, desperately need what Social Security offers. I'm not a big-government fan, but if we as a country would still like to provide that for them, then going down the path of pretending Social Security is an individual retirement account is complete lunacy. As I said before, those folks are probably the exact same ones who will wind up unable to successfully invest their "Social Security IRA." So, let's call a spade a spade. Under the guise of fixing Social Security, this "reform" is just a subterfuge to end the government's liability and let down the people it was supposed to help.
Note to readers
Contrarian Chronicles will be on vacation until its next edition on Jan. 10, I'd like to invite readers to peruse my past daily columns at www.Fleckensteincapital.com. My most recent speech, "Is the Fed a Short Sale?", which I gave at the 2004 New Orleans Investment Conference, is also posted on the home page.
A complimentary username/password of free/free has been established to allow access to the site. I wish you all a Merry Christmas and a Happy New Year.
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