Subject: RE: Questions for Sam Beard:"Investor's License"
As for entrusting people's social security to professional investment managers with a "proven track record":
Such managers often fail to do better than the stock market as a whole. And the market as a whole has great risks. For just two examples, last year's stock market slump cost CEO Philip Purcell of Morgan Stanley Dean Witter and Co. $193.7 million, a loss of 58.7%. And it cost Merrill Lynch CEO David Komansky $164.7 million, a loss of 58.1%. (Chicago Sun-Times, October 3, 1998, Page 28).
Even if a manager tries to balance stock investments with investments in bonds, this may only reduce rather than eliminate risk. Bonds sometimes decline in value at the same time stocks do.
How many professional money managers would have predicted in 1966 that the real rate of return for the stock market from then to 1981 would be 0.4%? Even the returns of the last sixteen years have "barely compensated investors for the dreadful stock returns realized in the previous fifteen years."
(Jeremy Siegel, Professor of Finance, Wharton School, Stocks for the Long Run, 2nd edition, 1998, Page 14.)
Yet we're supposed to entrust Social Security to these managers?
Even successful fund manager Peter Lynch wouldn't venture to predict the market for the next three to six months. He was sure, though, "that the next 7,000 points or 14,000 points will be on the up-side." (Chicago Sun-Times September 14, 1998). 7,000 or 14,000? Talk about leaving a wide margin for error! That may be as close as anyone should hazard to predict, but hardly seems close enough to depend on when investing Social Security.
Suppose, however, the government were somehow wise enough to find exceptional managers for the millions of private Social "Security" accounts, managers who somehow could beat the principle that the greater the return, the greater the risk, managers who would be regulated more effectively than were many savings and loan associations.
Even then, the transition costs of moving into individual accounts woud be so great that "every cohort now alive faces subtantial losses from partial or full privatization."
(John Mueller, Senior Vice President and Chief Economist, Lehrman Bell Mueller Cannon Inc. "Winners and Losers from "Privatizing" Social Security, a report commissioned by the National Committee to Preserve Social Security and Medicare, Washington, D.C., March 1999, Summary, Page 1.)
Instead on trusting Social Security to individual accounts inferior in risk and return to the current system, let's keep the current guarantees.
