Buying High, Selling Low—One More Reason Not
to Privatize Social Security
by Teresa Ghilarducci
Teresa Ghilarducci is Associate Professor of Economics at
the University of Notre Dame, a member of the Pension Benefit
Guaranty Corporation’s Advisory Board,
and a Trustee of the Indiana Public Employees Pension Fund.
Nothing has changed
and everything has changed. So far in 2001, the financial markets do what they
always do; they go up and down. Recently, we’ve been
witnessing the down part.
Most indices, such as the S&P, DOW, and NASDAQ,
have broken some record for bad news.
That’s not the whole story. Consolers quickly point
out that most losses were paper losses. Stocks went up and
went down, but none of it was real, unless you actually sold
stocks that fell in value. But, the ugly and enduring truth
is that when stock prices fall, people sell.
What makes this
human reaction more financially deadly is that more people
own stock than ever before. Today, almost half of people own stock, compared
to less than 30 percent 10 years ago. Tragically, most of this is because
fewer people have access to secure defined benefit pension
plans, such as that offered by BAC’s International
Pension Fund. As a result, more and more individuals are
forced to manage their own retirement savings. This is not
good. It’s
expensive.
Most individuals who invest in stocks pay retail fees of
1 percent; institutional funds pay half that. These fees
make a difference: a 1/2 percent drop in your fee can raise
your account value by 10 percent.
We also know that human behavior—running for cover—is the wrong thing
to do in financial markets. The shift away from pension funds to a reliance on
individual-directed accounts as their sole pension income may make people feel
like real players, but it is bad policy for securing retirement income.
Human
psychology is such that we forget bad things. Good humans think this way. If
we didn’t, the species would have died out. Most people keep trying,
hope for the best, and sort out troubling news.
But this means if you are a
good human, you are a lousy investor.
Our overconfidence makes us think we know something about trends or stock.
We remember our wins, and forget our losses.
First, think of the stock market as a large casino.
It can be exciting or devastating, but it is always biased towards the house.
Second,
always invest in “non-human” ways. In other
words, decide what your asset allocation will be, and only
buy mutual funds —preferably
ones with the smallest fees and best performance, so-called indexed or passive
funds. Have an independent financial advisor check it once a year and do
what she or he says.
Last, privatizing Social Security is
a bad idea—a very bad idea. President
Bush supports Wall Street’s idea to turn Social Security into individual
accounts. Doubtless, people are intrigued by the idea of having an account
balance rather than insurance (inflation indexed) that will pay them when
needed for retirement, disability, or death. After all, we hope inflation
won’t eat
our savings and we think we won’t become disabled and can work as long
as we want. Why do we think that way? We’re human.
If you retire when the
market is up, you and your family might have more than you would under Social
Security, unless you live too long and the money in your account runs out.
But if you retire in a down market, you’re instantly
poor. You don’t know what companies are good bets and you have lost more
money and paid more in fees than you will ever admit. Worse, if you die young
or are disabled, your family will not have the death and disability available
to all working Americans under Social Security.
Don’t be fooled by the rosy
scenarios the administration paints about privatizing Social Security. Save Social
Security—that is, if you’re human.
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