SS Privitization

[BadBoyBenny]

OK, long time infrequent poster on this board. I an decent about evaluating individual companies, and know the basics of investing, but I don't know much about macroeconomics.

Can someone explain to me how SS privitization is likely to affect treasuries and the equity markets? If people are allowed to invest part of their SS money in something like the S&P wouldn't that lead to a long term upward shift in equity valuations? Also wouldn't the money that is no longer availible to buy bonds mean that the government will have to pay higher rates to attract more foreing and private investment so we can cover our deficit?

So then, if I think SS privitzation is a good bet, would it be smart to short Us Bonds and buy an ETF? Someone tell me what I'm missing.

[adios]

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Can someone explain to me how SS privitization is likely to affect treasuries and the equity markets?

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FWIW I don't think we'll see SS privitization, at least not in the forseeable future but since it's a possibility I'll give you my thoughts on it.

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If people are allowed to invest part of their SS money in something like the S&P wouldn't that lead to a long term upward shift in equity valuations?

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I would guess that it probably would. So much depends on the rules that would govern the private accounts regarding investment vehicles.

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Also wouldn't the money that is no longer availible to buy bonds mean that the government will have to pay higher rates to attract more foreing and private investment so we can cover our deficit?

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The government wil have to sell more bonds near term to cover the lost revenue from decreased SS payments. To the extent that government spending is decreased in other areas, the value of the U.S. dollar remains constant and the demand for U.S. Treasuries continues (foreigners bought $81 billion worth of Treasuries in November of 2004) will determine if significantly higher rates occur. Since privitized accounts would decrease the government long term SS liability, eventually the government will need less money to meet SS commitments eventually the U.S. will need less money to fund SS on a per capita basis.

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So then, if I think SS privitzation is a good bet, would it be smart to short Us Bonds and buy an ETF? Someone tell me what I'm missing.

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Not necessarily [img]/images/graemlins/smile.gif[/img]. As we both know the market anticipates events. For arguments sake say that I'm wrong and the market has factored in a 100% certainty that privitization will occur. Shouldn't current prices reflect this? My point is that a significant factor in determining if this is a good bet would be understanding the probabilities (making an assessment) that the market is assigning to privitization and the form it will take if enacted.

[lehighguy]

The theory of SS privatization is this:
The government currently puts excess SS funds in a trust. As a result, the government doesn't have to issue as many bonds. However, the government is going to take some of that money and give people private accounts, many of which will end up purchasing S+P index funds and such (stocks). The hope is that stocks have greater returns over the next 40 years then tresuries, thus increasing the amount of money available for S.S.

Before I get into my personal thoughts on wether that will work, I'll address your question of how it will effect markets. Yes, interest rates will go up, and yes the stock market may go up. However, remeber that smart people on Wall Street know this. So if they see a bunch of money come into the system that HAS TO BUY, they will gladly sell such overpriced garbage to investors. So if stock prices get to far above what they should be sellers will come back in and bring them down to earth. The tech boom shows this. Normal investors (fish) bought up junk from smart investors (sharks) who sold it to them. It can't go on forever, because the fish run out of money.

That being said, does SS privitization work. Well the theory that stocks return more then treasuries seems pretty sound, albiet stocks are more risky. One big problem is that fees charge by mutual funds will reduce this advantage quite a bit. Also, the higher interest rate of government bonds as a result of borrowing will cause a slowdown in the economy. I've noted in other posts how are atrocious budget and trade deficiets are going to destroy us.

All that aside, I'm not so much worried about stocks performing badly over the long run (the theory of the plan seems sound) as I am about politics. We will be giving people control over thier retirements. Most people are stupid. And when the stupid people lose thier money they are going to demand the government pay for thier retirement, which the government will do because politicians want those people to vote for them. So the government will have to pick up the slack for all the people that made bad investments, thus meaning the privitization plan won't save a dime in my mind. If the government told those people to [censored] off and starve to death for being stupid it might, but that isn't how it will work.

I'm all for small government myself. Low tax low spending type. But that's because I trust myself with my money. The only person I trust less with money then the government is the people I play poker against, i.e. the average american.

[Dan Mezick]

The USGOV has been taking cash out the SOCSEC fund and replacing it with IOUs for decades.

If employers did this, they would be punished severely under the rules of the Employee Retirement Income Security Act (ERISA) which covers a wide range of employee benefit plans.

The ERISA law is a Federal law.

Social Security is basically an overfunded defined benefit plan (in terms of ERISA) whose actuarial surplus has been pilfered by the US government.

Interestingly, what the government did was perfectly legal.

Interestingly, the same can be said of ENRON's pension plan 'overhaul' which resulted in less benefits for all participants.

In the 'overhaul' of the ENRON pension plan, their defined benefit plan was converted to a defined contribution plan. This is almost exactly what is happening with Social Security.

[adios]

Nice post.