RE: Discussion Questions

[Reed Davis <rdavis2@ix.netcom.com>]

Carolyn Weaver wrote:
>
> First, "What if we had another Great Depression or at least another
> rotten period like we had in the 1970s.  Wouldn't a system of personal
> accounts collapse?
>
That depends on what the personal accounts were being used for.  If they
were being used to provide for basic survival, there would be a major
problem.  But if they were being used to provide discretionary retirement
income, account holders would get by, albeit at a somewhat lower standard
of living.  However, it's not clear to me that the government should be
mandating saving that is, by definition, discretionary.

I see Social Security as being composed of three parts: a safety-net, an
insurance system, and a retirement system.  The safety-net, of course, is
funded by public money, not personal accounts.  The insurance system is
funded with premiums paid by the future beneficiaries.  Insurance companies
invest those premiums and take on the risks (and benefits) of the market.
It can well be argued that the government can mandate that everyone must
carry some minimal level of retirement and disability insurance, just as
they must carry a minimal level of auto insurance.  Given that, however,
I see no reason why they should mandate or guarantee personal accounts.

By the way, you are correct that the 1970s was a rotten time to invest.
The first graph at http://people.delphi.com/rd100/sp46.html shows the
S&P adjusted for inflation during that period.
>
> Second, "Even if we have personal accounts, we ought to change the
> investment policy for the trust funds. It just doesn't make sense to keep
> the social security funds invested entirely in low-yielding government
> bonds. With all the financial expertise now available, it ought to be easy
> to figure out how to ensure the government invests in a neutral way,
> without any political interference.  How can it be done?"
>
As I said, I don't know that the government should be directly involved in
personal accounts.  If they do play a role, it should likely be restricted
to providing education and, perhaps, incentives.  Still, the government
does need to invest in some manner in order that it be prepared for economic
downturns.  One way that it can do this is to pay down the public debt so
that it will have more borrowing capacity should a downturn come.  This may
make more sense than effectively buying stocks on margin.

Reed Davis