Free Money for Seniors vs. Forced Savings

We have looked at conservative stock investing vs. Social Security and found it a bit less impressive than some results found in some conservative sources (including an example given in Charles Murray’s book). Maybe I did the math incorrectly. But most likely the bigger reason is here we compare Social Security with inflation adjusted annuities. That inflation adjustment rider is expensive. Free money for seniors to the tune of $1000-$1300/month plus an annuity does rather well, even with a lower than FICA/OASI lifetime savings.

And we can expect a lower than FICA lifetime savings on the part of many unless the government forces people to save, and that would present serious problems.

The Problems with Forced Savings Plans

Many people when left to their own devices will spend their money while young and only start saving for retirement after the need is obvious, when the hair starts turning gray and it’s too late to take full advantage of the market. Others invest recklessly while young, going for 10:1 gains, succeeding sometimes and other times going bust. (The author of this site falls into the latter category.) A forced savings plan easily takes care of workers in the first category. Make people save while they are young and they take advantage of the markets over a long enough time to average out the bumps. But to deal with the second category, the government must restrict investments to those it considers safe enough for retirement savings. In other words, the government must get involved in investment decisions for millions of workers.

We have a name for a system where government directs investments to favored corporations: fascism. It is no coincidence that Chile pioneered forced savings while under the dictatorship of Augusto Pinochet. Fascism sometimes works—Mussolini made the trains run on time and Hitler got Germany back to work—but the downside of such concentrations of power can be quite unpleasant. Even without virulent racism or nationalism, a system of government-private partnership can degenerate into crony capitalism.

Our pay as you go retirement safety net keeps the government out of investment decisions. Social Security is in some ways more free market friendly than a forced savings plan. But pay as you go also gives the working class inferior returns on investment overall. It thus widens the wealth gap between workers and capitalists when investments rise faster than wages. Furthermore, our government is becoming a poor credit risk, and government bonds are the sole investment of the Baby Boomer trust fund.

Our proposal is to let workers fly the financial trapeze, but with a more than adequate safety net. If you want to take risks, you could. If you succeed, great! Upward mobility is enhanced. If you fail, you get a lower middle class fallback retirement. If you want a guaranteed better than lower middle class retirement, you can have that as well: save and invest. Over time we shall explore ways to make conservative investing even safer, how to make ordinary bank CDs pay and how to tame some of the fluctuations of the markets without stifling new companies. What we don’t do is force everyone into the same low risk low return retirement plan.

Index Funds vs. People’s Capitalism

If you follow the popular financial media you will hear it repeatedly: buy index funds; they are hard to beat in the long term. The advice has merit, but I still don’t like index funds, and have some qualms about mutual funds in general. They have their place and do not take my dislike as financial advice. The problem is global. Index funds defeat the fundamental purpose of stocks: coupling risk, responsibility and reward.

When most company stock is owned by mutual funds, who owns the companies? Do we want the big mutual fund companies to control the corporate boards? Or do we want the few direct shareholders to control the boards with a minority of shares? Or do we want management to play without owner supervision?

And then we have the fundamental dilemma of mutual funds: a successful open-ended fund attracts more shareholders. We have positive feedback. The fund manager must then either diversify beyond his expertise or move the market of the shares the fund holds. And should investors lose confidence in the fund, the fund must sell shares which pushes down the price of the portfolio, thus feeding the selling frenzy.

Positive feedback leads to bubbles.

And what do index funds do but buy in proportion to market cap? Index funds are by definition trend followers. Trend followers increase market momentum, making the market peaks higher and valleys lower. That which is a timid investment for a few becomes a source of market mania if too many people resort to index funds. And index funds are supposed to be cheap to manage; they have no business voting their shares.

And what of new corporations which are not on any index? Do we limit their investments to rich angels and venture capital firms? Wouldn’t it be more fun to have the green hippies who hang out at Whole Foods investing at the ground floor of the latest alternative energy firms? For science fiction fans to invest in spaceships? If we are to have democratic government and capitalism, perhaps The People need to get involved in the game of capitalism. Otherwise, power flows to the experts: the oligarchs and the bureaucrats.

Worker ownership of the means of production entails risk, responsibility. A safety net for seniors is desirable if all are to be allowed to play.

And it is not for everyone. Conservative investments can and should be available to all who have the patience for them as well as those who opt to aggressively save near the end of their careers. If you want the stability that Social Security promises, the market could be set up to provide it.

Stabilizing the Markets

Business is uncertain. There will always be risk. But much of the risk is artificial, created by leverage and unsupported derivatives. Many big investments are kind of boring without these risk concentrators and accentuators. Many big money players want more action without having to muck about actually running a business.

The government could clamp down on some these games without reams of regulations or unduly burdening the economy. A classic example of such successful regulation was when the government demanded more than 10% margin for buying stocks after the crash of 1929. We have not had a comparable crash since. A more recent negative example has been the government’s promotion of low money down mortgages. As with stocks in 1929, excessive leverage led to a great crash.

Other regulations have been less productive. Excessive reporting requirements unduly burden smaller corporations. Especially with Sarbanes-Oxley, it is often better for a smaller new corporation better to be bought out than have an IPO. And Sarbanes-Oxley has failed to make the markets any safer. We will explore some simpler options in a future article.

And we shall also explore how some non Wall St investments could give better returns with some regulatory changes and a few tweaks in the tax code. Those who fail to invest while young or lose to risky investments need some conservative options to place their catch-up savings.