RE: Complexity, Some Questions on the Topic, and Charles Ponzi

[Michael Jones <powderfinger99@yahoo.com>]

Mr. Reischauer,

Thank you. You have kindly given us quite a bit of ammunition
here.

<<<<
1. Should there be any restrictions on permissablke investments?
Should only index funds be allowed? Only approved mutual funds,
actively managed or index? Individual stocks and bonds? Real estate?
Collectibles? My brother-in-laws dry cleaning store?
>>>>

Where the funds should be invested, how they should be invested
and what the administration costs will be really are valid concerns.
As an active investor myself, I constantly must consider these
trade offs. I suspect that many passive investors do pay too much
for their investments and invest in funds that won't give the 
best return. Are they still better off than doing nothing?
For most investors, the answer is YES.

There are only a couple things you need to know to be a successful
mutual fund investor. (Investing in individual stocks requires
a little more effort and involvement). Here they are:

* Buy and hold long term.
* Buy index mutual funds.
* Dollar cost average.

The dirty little secret of the mutual fund industry is that most
of the active managed funds do not beat the index funds. A fund
that is actively managed as opposed to being passively managed
(index fund) starts off anywhere from 1-2+% points in the hole.
Before you even get any return from an actively managed fund,
these costs must be overcomes to beat the index. The problem
is that most of the funds (85-90%) never even beat the return
of the index funds before consideration of the costs.

What are the costs?

Index fund: 0.19%, turnover 5%.
Managed fund: 1.2%, turnover 50-200%.

In order for the managed fund to beat the index it must first
overcome the 1% extra cost. In addition, because these funds
buy/sell assets more often than the index (turnover), they must
overcome these costs as well. A high turnover can cause the
realization of capital gains which forces an immediate tax 
liability for the holder.

Getting back to your original question. I would restrict 
the investments to higher quality bonds and index funds.
I would not want to invest in companies that did not have
stock. The good thing that stock brings with it is the SEC
regulations which force companies to agreed upon "rules of
engagement" with investors. 

<<<<
Charles Ponzi: I wish I had a dollar for every time someone has
called Social Security a Ponzi scheme over the past two years. It's
a great line, but its an inaccurate one.
>>>>

ROTFL! It's not a Ponzi scheme because government can force
participation? It sounds to me like a Ponzi's DREAM Ponzi
scheme!

<<<<
That does not mean that the burdens of supporting its benefits
wouldn't rise, just that under the current structure the will 
remain under 8 percent of GDP for the next 75 years.
>>>>

It is noteworthy that Mr. R chose GDP, as opposed to some other
figure of comparison such as percent of wages or portion of
federal budget. The GDP figure sounds much nicer because it makes
it appear that the cost of the system never escalates as a
portion of total economic output. The system can be funded because
economic output and productivity will be increase. The workers
of the future, although smaller in number relative to retirees,
will be able to fund retirement benefits due to increased 
productivity.

I don't find fault with this statement. I agree that this
will likely happen, since I am bullish on our economy. The 
question is how does this wealth finance benefits?

What Mr. R doesn't mention is the cost relative to wages.
It is expected to go up 50-75% of payroll tax, if you include
the payments made to SS by the treasury from SSTF bond
redemption.

Do we really want to finance the system by a much higher tax
burden on future workers? Wages right now are already taxed
at fairly high marginal rates. (The marginal rate for an 
income of 30,000 is about 45%, including FED + FICA + 
State taxes). At the same time, wage growth is flat or
increasing slowly.

Instead of taking more from wage earners, the benefits should
be funded by the economic engine of our economy: the capital
markets. If we agree that the economy of the future will be
more prosperous, empower people to take direct ownership in
the engine of our economy with stock ownership. Stock ownership
would give everyone a direct economic stake in the companies which
are driving the GDP growth.

If reform does not take this path, I fear that those trapped in
the current system will be lead down the path of government
dependency. The lower and middle classes will fight over who
gets benefits because low wage growth and higher tax rates will
make it more difficult for them to save for their own retirement,
because more of their wages will be needed for current consumption.

Those who have become wealthy by investing can escape the frey 
because they will not need wage income.

Michael