A Forum for Grinches and Ho-Ho-Hoes

[Adder]

Originally posted by ltl/fb
And, I wish I could find the ad or article or something I saw recently about the effect of admin/investment mgmt fees eating into people's accounts. Another big nut that does not affect those who receive defined benefits, but most definitely does affect any kind if investment acct.

Um... defined benefit plans are not managed?? I don't think so.

[Adder]

Originally posted by Sidd Finch
Unfortunately, you can't assume steady growth in the stock market. We've all heard how stocks outperform -- but that is historically, over time, past performance that does not guarantee future results, yadda yadda yadda. If Year 40 in this scenario is comparable to, say, 2001... ouch. Or 1987 -- you don't have to use the "Depression/1929" scenario for it to be scary.

No. You just have to assume that the next 40 years (or any given future 40 year period) will be totally unlike any prior 40 year period. Indeed, you need to assume that every year in the the next 40 years (really more like 60+ because you don't take it all out at once either) will be like 2001, 1987, or the other handful of rough years.

Moreover, no one that I know of has done a study of stock market returns in years following big in-flows. I would think, though I don't know all the numbers, that any PRA program worth the effort would result in a pretty substantial inflow, one large enough to puff up share prices. And that creates a dangerous situation -- the investor who gets in during a run-up is always the most vulnerable.

You are talking about getting in at $50 a month over 40 years. That is not "getting in during a run-up."

But you are right, we are talking about a structural change inthe markets with large new amounts of money to be invested, and it is hard to predict what the effect will be.

[Sidd Finch]

Originally posted by Adder
No. You just have to assume that the next 40 years (or any given future 40 year period) will be totally unlike any prior 40 year period. Indeed, you need to assume that every year in the the next 40 years (really more like 60+ because you don't take it all out at once either) will be like 2001, 1987, or the other handful of rough years.

No. I'm not talking about every year being a bear market. One very bad year will cause a whole lot of pain for people who are relying on SS as their safety net. Ask anyone what was planning to retire in 2002 what happened to their plans. Then consider what would have happened to those people if they were completely dependent on their private savings, and if those private savings, even in a good-case scenario, had been only enough to cover basic living expenses.

You are talking about getting in at $50 a month over 40 years. That is not "getting in during a run-up."

Once again, no. The "run-up" to which I refer is not caused by a single investor, but by the aggregate of people putting a substantial portion of their SS taxes into the market.

In 2002, SS revenues were over $615 billion (and that was a relatively low year given the performance of the economy that year). I don't know what the current Bush plan is, assuming there is such a thing, but people have floated the idea of half of SS taxes going into the market -- even if it's half of the employee's contribution, that is a huge chunk of money suddenly added to the market. Particularly if the investment choices are restricted to a much smaller subset of the overall market, as many have proposed.


eta: To put this in perspective -- assume that PRAs result in an additional $300 billion pumped into the market each year. That's $25 billion/month, and well under half of current SS revenues. In November 2004 total inflows to stock mutual funds were about $21 billion -- one of the highest months all year. Remember how fast the market rose in November? (And yes, I know -- investments are not limited to mutual fund investments, but looking at them is instructive.)

When you talk about putting half of SS revenues into PRAs, and allowing people to invest those PRAs in only a narrow slice of the overall market, you are creating strong potential for a run-up -- one that will benefit current investors but risks serious harm to those who only get in durin the run-up.

[Sidd Finch]

Originally posted by Adder
Um... defined benefit plans are not managed?? I don't think so.

Defined benefit plans are managed, but they are managed as a pool rather than individually, which drives the per-dollar management costs way down.

The purpose of PRAs is to create individual accounts that will not be managed as a pool.

[sgtclub]

Originally posted by Sidd Finch

When you talk about putting half of SS revenues into PRAs, and allowing people to invest those PRAs in only a narrow slice of the overall market, you are creating strong potential for a run-up -- one that will benefit current investors but risks serious harm to those who only get in durin the run-up.

Aren't you only considering 1 side of the equation? In other words, aren't you failing to consider what positive effect the investment of those amounts would have on the economy?

[Mmmm, Burger (C.J.)]

Originally posted by sgtclub
aren't you failing to consider what positive effect the investment of those amounts would have on the economy?

oooh, oooh, oooh. I know! I know! Lots of capital available for all kinds of new investments! dot.coms! More dot.coms, with foosball tables! and mini-motorscooters to roam the halls! And no business plans!!!

What drives legitimate and productive capital spending is good investment opportunties, a stable economy, and low interest rates, all of which are helped by less gov't debt. The availability of spare funds in investors hands does not drive sensible investment, but rther irrational investment.

[Adder]

Originally posted by Sidd Finch
No. I'm not talking about every year being a bear market. One very bad year will cause a whole lot of pain for people who are relying on SS as their safety net. Ask anyone what was planning to retire in 2002 what happened to their plans. Then consider what would have happened to those people if they were completely dependent on their private savings, and if those private savings, even in a good-case scenario, had been only enough to cover basic living expenses.

Well, those folks had a few different choices. They could put off there retirement for a year or two - unfortunate but hardly a tragedy. Or they could risk it and retire, hoping that their nest egg will grow sufficiently to cover their needs.

Again, you (and others) seem to be looking at this as if the individual retiree is getting entirely in at the beginning, and out at retirement.

Once again, no. The "run-up" to which I refer is not caused by a single investor, but by the aggregate of people putting a substantial portion of their SS taxes into the market.

I didn't suggest that the "run-up" was the result of a single investor. I suggested that any given investor was not getting "in" during a run up. They were getting in over time with a small systematic investment. And getting out the same way. The result is substantially decreased exposure to swings in the market.

In 2002, SS revenues were over $615 billion (and that was a relatively low year given the performance of the economy that year). I don't know what the current Bush plan is, assuming there is such a thing, but people have floated the idea of half of SS taxes going into the market -- even if it's half of the employee's contribution, that is a huge chunk of money suddenly added to the market. Particularly if the investment choices are restricted to a much smaller subset of the overall market, as many have proposed.

Yes. We have no disagreement that there will be a lot more money out there in the market. Nor do I think we disagree that neither of us really knows what the net effect will be. Especially as the flow of money into the markets will be relatively constant over time, rather than just a big dump on the front end.

Originally posted by sgtclub
Aren't you only considering 1 side of the equation? In other words, aren't you failing to consider what positive effect the investment of those amounts would have on the economy?

Sometimes I feel bad about posting things that aren't as clearly expressed or carefully considered as the points made by Ty, Sidd and others who are more or less on my side of the table. But since Hank and Bilmore have you, I think it all evens out.

[sgtclub]

Originally posted by Mmmm, Burger (C.J.)
oooh, oooh, oooh. I know! I know! Lots of capital available for all kinds of new investments! dot.coms! More dot.coms, with foosball tables! and mini-motorscooters to roam the halls! And no business plans!!!

What drives legitimate and productive capital spending is good investment opportunties, a stable economy, and low interest rates, all of which are helped by less gov't debt. The availability of spare funds in investors hands does not drive sensible investment, but rther irrational investment.

Huh? Are you saying that wealth creation will have zero effect on the economy?

[sgtclub]

Originally posted by ironweed
Sometimes I feel bad about posting things that aren't as clearly expressed or carefully considered as the points made by Ty, Sidd and others who are more or less on my side of the table. But since Hank and Bilmore have you, I think it all evens out.

Who are you again?

[Sidd Finch]

Originally posted by sgtclub
Aren't you only considering 1 side of the equation? In other words, aren't you failing to consider what positive effect the investment of those amounts would have on the economy?

It is unclear to me that the American economy is starved for investment -- particularly if you are talking about limiting the PRA options to blue-chip stocks, for example.

In any event, how do you evaluate the macro-effect of pumping money into the stock market? Did the huge inflow of cash into the stock market in 1999 create a long term benefit? In some sectors, sure. In others, it created huge distortions and bad incentives.

On the other hand, the effect of increasing the deficit by another $150 billion a year -- before the first penny of money is borrowed to cover SS payments -- will be pretty uniformly rotten. Add to that the additional..... how many trillions? ... to cover benefits for current retirees, and the effect on interest rates is likely to offset to zero and beyond any positive economic effects.


eta: The "$150 billion a year" is roughly the difference between current SS revenues and payments. This amount is used to reduce the reported federal deficit (except during the tenure of a certain deficit-reducing President). It's considered "off-budget" -- the money is spent, the national debt grows, but the White House gets to pretend that it doesn't exist.

If the US has to finance that additional debt in a competitive marketplace, rather than from the captive SS trust fund, that will affect interest rates -- I believe; I am not sure how the rates for debt from SS trust fund are set but the fund does not have the option of shopping around, so....

[Sidd Finch]

Originally posted by sgtclub
Who are you again?

Weed is an old-timer. Picture him looking like Grandpa Simpson. But from a blue state.

[taxwonk]

Originally posted by sgtclub
Huh? Are you saying that wealth creation will have zero effect on the economy?

If that wealth creation is purely a result of more dollars chasing the same amount of stock, yes. Or, if all the corporations that bought in their stock during the last few years to keep the value inflated use the run-up to dump that stock back into the market without any plans to use the cash to increase pruductivity or wages.

Simply dumping cash into the market without increasing wages and prductivity lead to the growth of only one thing, inlfation.

[sgtclub]

Originally posted by Sidd Finch
It is unclear to me that the American economy is starved for investment -- particularly if you are talking about limiting the PRA options to blue-chip stocks, for example.

In any event, how do you evaluate the macro-effect of pumping money into the stock market? Did the huge inflow of cash into the stock market in 1999 create a long term benefit? In some sectors, sure. In others, it created huge distortions and bad incentives.

On the other hand, the effect of increasing the deficit by another $150 billion a year -- before the first penny of money is borrowed to cover SS payments -- will be pretty uniformly rotten. Add to that the additional..... how many trillions? ... to cover benefits for current retirees, and the effect on interest rates is likely to offset to zero and beyond any positive economic effects.


eta: The "$150 billion a year" is roughly the difference between current SS revenues and payments. This amount is used to reduce the reported federal deficit (except during the tenure of a certain deficit-reducing President). It's considered "off-budget" -- the money is spent, the national debt grows, but the White House gets to pretend that it doesn't exist.

If the US has to finance that additional debt in a competitive marketplace, rather than from the captive SS trust fund, that will affect interest rates -- I believe; I am not sure how the rates for debt from SS trust fund are set but the fund does not have the option of shopping around, so....

I was thinking about this more in terms of individual wealth, rather than company wealth. Dumping more cash into the markets should increase stock prices, meaning that those that currently hold the stock will see their investments appreciate. Although there may be an increase in new issues resulting from the higher stock prices (i.e., cheaper capital), I don't see this as being the same model as in the 90s, where the increase in capital was spurred by demand for new issues by companies. In other words, I believe that the primary effect will be creation of individual wealth, rather than capital investment in companies, and that an increase in individual weatlh would have some benefit to the economy as a whole.

[sgtclub]

Originally posted by taxwonk
If that wealth creation is purely a result of more dollars chasing the same amount of stock, yes. Or, if all the corporations that bought in their stock during the last few years to keep the value inflated use the run-up to dump that stock back into the market without any plans to use the cash to increase pruductivity or wages.

Simply dumping cash into the market without increasing wages and prductivity lead to the growth of only one thing, inlfation.

My assumption would be the former, although the availability of new capital and cheaper equity financing would increase new issues from today's rate.