September 26, 2004
THE SECOND CHOICE IS YOURS:
'Ownership society': why the US can't buy in (David R. Francis. 9/27/04, CS Monitor)
Many Americans - perhaps most of them - aren't ready for President Bush's "ownership society." The idea sounds good. Employees could shift a portion of what they pay into Social Security and put it into individual accounts that might gain higher returns in, say, the stock market.They could also reduce their tax bill by starting Health Savings Accounts, Retirement Savings Accounts, and Lifetime Savings Accounts.
These options reflect a certain conservative logic. Rather than having the government or your company decide how much retirement money or healthcare you get, you can decide for yourself.
"If you own something, you have a vital stake in the future of our country," Mr. Bush explains. "The more ownership there is in America, the more vitality there is in America."
The flaw in this logic is Americans' lack of financial sophistication. For example: Less than one-quarter of working-age people characterize themselves as "knowledgeable investors," according to surveys by John Hancock Financial Services. Even this minority shows "considerable confusion." For example: Many surveyed thought money-market funds included stocks and bonds.
That doesn't mean Americans are stupid. They just have better things to do.
That's why such a system has to be mandatory and have default settings, and only then a few choices available to those who pay attention. So, for example, anyone below the age of 50 or whatever would just have their contributions automatically directed to an S&P 500 index fund. Posted by Orrin Judd at September 26, 2004 8:35 PM
Americans may not consider themselves to be "knowledgeable investors", but they do seem to figure out the basics of IRAs, 401K plans, and savings plans quickly enough. That's the level of sophistication that will be required.
HSA's -- that will go into an account from which you deduct money for health insurance, co-pays, etc. That's going to work either like a money market account, or an account to which one submits receipts a few times a year. Seems easy.
Retirement savings accounts -- like an IRA or 401K, and we already know how to do those.
Lifetime savings accounts -- ditto. One could get more sophisticated with this or an RSA, and if one wishes to do so, there will be a whole industry of reputable people to help. Example: my 401K is invested with TIAA; my regular savings with Vanguard. I'm not worried.
Default settings and a rule book will be necessary. But Mr. Francis is mistaken -- while Americans may not be "knowledgeable investors", they've demonstrated themselves capable of learning whatever they need to learn.
Posted by: Steve White at September 26, 2004 11:08 PMOne problem with putting SS money into an S&P 500 index fund is, there may be too much SS money. The pension part of SS, (Old Age and Survivors' Insurance), will have revenues totalling $ 570 billion this year alone, (± 15 billion).
If workers are only allowed to allocate 2.5% of their pay to a market account, that'd be somewhere around $ 120 billion, an amount that the market can absorb.
If, however, we gradually allow workers to invest their entire contribution to OASI, it would be hundreds of billions, $ 230 in '04, and possibly $ 400+ billion by 2014.
Much of the SS money will have to go into bonds and money market.
Posted by: Michael Herdegen at September 26, 2004 11:09 PMWhy exactly will much of the money have to go into the bond and money market? Please explain.
One thing I've not seen is if the ownership accounts will be limited to holding investments in US companies. If they're not, might the rest of the world not have the investment opportunities to soak up the additional funds without forcing them all into money markets?
Not to mention the amazing leverage that such capital flows could possibly bring the US in helping the rest of the world embrace capitalism.
Of course, that would assume other countries make an effort to publicize their investment opportunities and make them attractive to individual US investors. Hmmm.
Here in Canada, we have the equivalent to a 401k plan, the Registered Retirement Plan. There's a 30% foreign content limit on it (to keep the economic nationalists happy) and it is a leading cause of the plans underperforming.
Posted by: BC Monkey at September 27, 2004 9:53 AM"It's mandatory, has few choices and ... elow the age of 50 would have contributions automarically dirtected.." oj- You call that ownership?
Posted by: Tom C, Stamford,Ct. at September 27, 2004 10:35 AMTom:
Yes. Where's your social security "contribution" now?
Posted by: oj at September 27, 2004 10:43 AMNo Orrin, diversified indices of the ilk offered by the Dimensional family, the greatest fund family on the planet, reducing the SDeviation while amplifying performance with value and international indices.
Posted by: JimGooding at September 27, 2004 10:59 AMBC Monkey:
The US stock market can't absorb an additional $ 400 billion a year without significant share price inflation. The last time it was tried was a period now referred to as "the Tech Bubble".
Right now the SS revenues are being used to buy US Gov't bonds.
It's a lead pipe cinch that exposure to foreign stocks will be limited. However, foreign firms that are willing to abide by US accounting practices are allowed to list on US stock exchanges, and those firms will be allowed to participate.
Posted by: Michael Herdegen at September 28, 2004 8:12 AMWell what I think that you don't have to be a invesemtn Guru or a genious to understand the theory behind everything. As a matter of fact it should be made clear that if Lifetime Savings Account is floated by Bush then it will effect almost all Americans in a positive way. Whats the point in blocking money say as in case of 529 plans, where your money is blocked for a good period of time but if need any cash at the very present moment you got to pay panelty of 10%.
I agree with what Mr Steve White, he is correct in his viewpoint. Whatever financial instrument one plans to buy the investor should and must understand his product........after all thats what financial analysts or advisor are for????
Nitish Tewary
Financial Analyst