DanAbrams999
12-13-2004, 10:51 AM
There is an impending, dangerous, artificial spike in the stock
market due to simply discussing privatizing social
security.
Republicans want Americans to believe that the stock
market has always been profitable and will continue to
be. Therefore the minimal return on investment (and
risk) that we currently have in social security should
be junked in favor of the stock market. This is not
only an oversimplification, it terribly
under-appreciates the factors involved.
Let’s say you belong to small group of people who have
been collecting Beanie Babies toys for years.
Recently, more and more “regular people” have started
buying them as investments but your group controls
over 90% of the existing market as well as the
manufacturing. Let’s say these Beanie Babies have been
appreciating in value at a historic rate of 8% and
currently yours are worth $20 each.
Along comes a major initiative that compels regular
people to purchase Beanie Babies. Would you sell yours
for $20 each? Of course you wouldn’t. You’d want a
premium because of the increased demand. In the mad
rush of the first regular people to be compelled to
actually buy the Beanie Babies the price would
inexorably skyrocket. In anticipation of that rush you
would raise your ask-price accordingly. With months or
even years of advanced warning the purchase price for
the first regular people would be terribly inflated.
Consequently the ROI for those first suckers would be
terrible. Of course you could cynically subscribe to
the “greater fool theory” (building castles in the
sky) but eventually the fundamentals would crush the
suckers.
But it is easy to see that, in this thinly-veiled
analogy, the Beanie Babies are the stock market and
we, the social security investors, are the suckers.
Privatizing social security is a terribly idea. Most
educated people understand the basic issues:
1. The stock market can’t guarantee profitability. And
to “insure” against loss would necessarily guarantee a
sub-par ROI.
2. We can’t afford the float. Current payers fund
current receivers. If current payers paid into their
own accounts that would mean current receivers would
be out in the cold.
3. Privatizing is a smoke screen for the greater scary
issue: the math doesn’t work out. We must have a
serious debate about how much we want to promise and
what it will take to fulfill that promise. Even if the
stock market could guarantee an 8% ROI forever it
wouldn’t be enough to make up for the projected
shortfalls.
4. The reality is that current Republican tactics
(lowering taxes and increasing deficits) are
effectively trying to bankrupt the system. Going from
a projected trillion-dollar surplus to a projected
trillion-dollar deficit is a collision course.
Republicans don’t believe in redistribution of wealth
or progressive policies. But since these are generally
accepted beliefs they have to obfuscate the debate.
Instead of earnestly arguing for the ending of popular
public programs they want to surreptitiously crash the
system.
(((SIDE BAR - These Republicans think if the system
crashes then we will have to massively trim back
government programs and thus flatten the taxation
system. This relates to the issue at hand because once
we make the transition to privatized social security
(where we are compelled to put money in for our own
retirement) it would then be a comparatively easy leap
to transition to a completely private program where we
are not compelled to put money in for our own
retirement. (Very much like the concept of school
vouchers is a step towards ending public education).
This second phase would effectively dismantle the
concept of social security. People who didn’t pay in
would be left on the street to starve. There would be
no progressive-redistributive aspect and so millions
would suffer. The proof of this is that most Americans
have not remotely invested enough for their own
retirement (most have not even used the maximum
investment benefit of their 401K). Yes, I am
advocating the “daddy-state” to some degree. But just
as Montanans are compelled to pay for the military,
when they’ve never been the victim of an international
attack, because they might need it someday I believe
we all should be compelled to put something in for our
own retirement and be guaranteed some sort of
profitable return.))))
But the under-reported aspect of privatizing social
security is that it simply won’t succeed because of
the way markets work. In fact, privatizing social
security will have the dreaded effect of stealing from
the poor and giving to the rich.
As soon as we announce that even some of the social
security money can enter the stock market the stock
owners will raise their ask prices and the market will
be overpriced, guaranteeing a bad return for the
social security investments. If you knew there was
going to be a giant new wave of money coming into the
market (same supply vs. now much more demand) why
would you sell your stock at the current price? They
“have” to buy and you don’t have to sell. So the
prices are going to artificially skyrocket. While the
majority of Americans own stock a very small minority
of Americans own the vast majority of stock.
Consequently the rich people who already own stock get
a giant burst of profit as soon as privatizing social
security is announced (actually the reality is that
this would happen at the first serious rumors of
privatizing social security).
Ask your Wall Street friends about what happens when
word gets out that someone is trying to do a takeover
(or otherwise accumulate stock). The prices regularly
go way up before the accumulator gets in. Now, once
social security investors have overpaid, their return
will necessarily be worse (because there will be less
room to move up given the same financial
fundamentals). And then there is the reverse problem
when the first social security investor people retire.
They will have to sell when they retire regardless of
the price. They can’t “ride-out” a bear market because
they simply don’t have the money to eat and pay rent.
Rich people can ride-out bear markets and provide some
stability to the market. Poor people don’t have that
ability. And so the market will exploit these poor
people by moving the price to ensure a sale at a bad
price. And so the returns for social security
investors should be estimated to be much worse than
historic returns (maybe even unprofitable).
I conclude that we need to have a serious debate and
reach consensus on the issue of progressive
taxation/redistribution of wealth. Once that is
reasonably settled we can have earnest discussions
about tactics. But for now I think (or hope) that
Americans, when they genuinely understand all that is
involved, would not hold the Republican view on
privatizing social security.
Thanks for taking the time to read and consider my
arguments.
I have numerous other “brilliant” ideas but I figure I
might be coming on too strong already.
Thanks again and keep fighting the good fight.
Sincerely,
Dan Abrams
(not the Dan Abrams from MSNBC)
market due to simply discussing privatizing social
security.
Republicans want Americans to believe that the stock
market has always been profitable and will continue to
be. Therefore the minimal return on investment (and
risk) that we currently have in social security should
be junked in favor of the stock market. This is not
only an oversimplification, it terribly
under-appreciates the factors involved.
Let’s say you belong to small group of people who have
been collecting Beanie Babies toys for years.
Recently, more and more “regular people” have started
buying them as investments but your group controls
over 90% of the existing market as well as the
manufacturing. Let’s say these Beanie Babies have been
appreciating in value at a historic rate of 8% and
currently yours are worth $20 each.
Along comes a major initiative that compels regular
people to purchase Beanie Babies. Would you sell yours
for $20 each? Of course you wouldn’t. You’d want a
premium because of the increased demand. In the mad
rush of the first regular people to be compelled to
actually buy the Beanie Babies the price would
inexorably skyrocket. In anticipation of that rush you
would raise your ask-price accordingly. With months or
even years of advanced warning the purchase price for
the first regular people would be terribly inflated.
Consequently the ROI for those first suckers would be
terrible. Of course you could cynically subscribe to
the “greater fool theory” (building castles in the
sky) but eventually the fundamentals would crush the
suckers.
But it is easy to see that, in this thinly-veiled
analogy, the Beanie Babies are the stock market and
we, the social security investors, are the suckers.
Privatizing social security is a terribly idea. Most
educated people understand the basic issues:
1. The stock market can’t guarantee profitability. And
to “insure” against loss would necessarily guarantee a
sub-par ROI.
2. We can’t afford the float. Current payers fund
current receivers. If current payers paid into their
own accounts that would mean current receivers would
be out in the cold.
3. Privatizing is a smoke screen for the greater scary
issue: the math doesn’t work out. We must have a
serious debate about how much we want to promise and
what it will take to fulfill that promise. Even if the
stock market could guarantee an 8% ROI forever it
wouldn’t be enough to make up for the projected
shortfalls.
4. The reality is that current Republican tactics
(lowering taxes and increasing deficits) are
effectively trying to bankrupt the system. Going from
a projected trillion-dollar surplus to a projected
trillion-dollar deficit is a collision course.
Republicans don’t believe in redistribution of wealth
or progressive policies. But since these are generally
accepted beliefs they have to obfuscate the debate.
Instead of earnestly arguing for the ending of popular
public programs they want to surreptitiously crash the
system.
(((SIDE BAR - These Republicans think if the system
crashes then we will have to massively trim back
government programs and thus flatten the taxation
system. This relates to the issue at hand because once
we make the transition to privatized social security
(where we are compelled to put money in for our own
retirement) it would then be a comparatively easy leap
to transition to a completely private program where we
are not compelled to put money in for our own
retirement. (Very much like the concept of school
vouchers is a step towards ending public education).
This second phase would effectively dismantle the
concept of social security. People who didn’t pay in
would be left on the street to starve. There would be
no progressive-redistributive aspect and so millions
would suffer. The proof of this is that most Americans
have not remotely invested enough for their own
retirement (most have not even used the maximum
investment benefit of their 401K). Yes, I am
advocating the “daddy-state” to some degree. But just
as Montanans are compelled to pay for the military,
when they’ve never been the victim of an international
attack, because they might need it someday I believe
we all should be compelled to put something in for our
own retirement and be guaranteed some sort of
profitable return.))))
But the under-reported aspect of privatizing social
security is that it simply won’t succeed because of
the way markets work. In fact, privatizing social
security will have the dreaded effect of stealing from
the poor and giving to the rich.
As soon as we announce that even some of the social
security money can enter the stock market the stock
owners will raise their ask prices and the market will
be overpriced, guaranteeing a bad return for the
social security investments. If you knew there was
going to be a giant new wave of money coming into the
market (same supply vs. now much more demand) why
would you sell your stock at the current price? They
“have” to buy and you don’t have to sell. So the
prices are going to artificially skyrocket. While the
majority of Americans own stock a very small minority
of Americans own the vast majority of stock.
Consequently the rich people who already own stock get
a giant burst of profit as soon as privatizing social
security is announced (actually the reality is that
this would happen at the first serious rumors of
privatizing social security).
Ask your Wall Street friends about what happens when
word gets out that someone is trying to do a takeover
(or otherwise accumulate stock). The prices regularly
go way up before the accumulator gets in. Now, once
social security investors have overpaid, their return
will necessarily be worse (because there will be less
room to move up given the same financial
fundamentals). And then there is the reverse problem
when the first social security investor people retire.
They will have to sell when they retire regardless of
the price. They can’t “ride-out” a bear market because
they simply don’t have the money to eat and pay rent.
Rich people can ride-out bear markets and provide some
stability to the market. Poor people don’t have that
ability. And so the market will exploit these poor
people by moving the price to ensure a sale at a bad
price. And so the returns for social security
investors should be estimated to be much worse than
historic returns (maybe even unprofitable).
I conclude that we need to have a serious debate and
reach consensus on the issue of progressive
taxation/redistribution of wealth. Once that is
reasonably settled we can have earnest discussions
about tactics. But for now I think (or hope) that
Americans, when they genuinely understand all that is
involved, would not hold the Republican view on
privatizing social security.
Thanks for taking the time to read and consider my
arguments.
I have numerous other “brilliant” ideas but I figure I
might be coming on too strong already.
Thanks again and keep fighting the good fight.
Sincerely,
Dan Abrams
(not the Dan Abrams from MSNBC)