Wednesday, February 16, 2005

Private Retirement Accounts--by Jim Finnegan at FEN

Ever since the election we have been bombarded with largely emotional and in some cases purely idiotic comments on the proposed social security reforms. (indeed there have been some so bad that I could not even force myself to read them--I will not give you names but if you search the Buffalo News you may find the articles. Be forewarned, they are really really bad.

I have pondered a reply. Indeed I almost thought about writing to the Buffalo News criticizing their choice of articles. However, true to form I ran out of time. ANd it is a good thing I did for now Jim Finnegan writing his editorial in Financial Engineering News says largely what I would have said and says it much better than I would have!

Private Retirement Accounts Could Use Some Financial Engineering

Some highlights:

  • "What if private retirement accounts had existed when I first entered the workforce and began Social Security contributions (in 1975 as a college student summer shift worker in a factory)? How would I have fared?"
  • "Personally, I favor private retirement accounts despite three key concerns:
    1. The short-term saving caps and longer-term four percent of earnings savings limit in the current plan are insufficient to provide most workers with even the opportunity to build a meaningful “nest egg” for retirement needs.
    2. The real transition costs will be much more than the $750 billion White House report estimate (And, I recognize this concern and the former one about limited rates of contributions are directly correlated.)
    3. The shift to private retirement accounts could discourage personal risk taking and entrepreneurship: As I noted earlier, I’m a 49 year old entrepreneur investing in FEN with very little current income to divert to a private investment account- when retirement is certainly on my mind.
  • "Not withstanding these concerns, I believe the existing transfer payment system (current workers paying for today’s retiree benefits) looks more like a collapsing Ponzi scheme as the ratio of workers to retirees continues to decline."
  • "But when it comes to their retirement, I don’t believe most people want to own a lifecycle retirement fund worth an uncertain future dollar value "
  • The field of financial engineering has the tools to bridge this gap between private retirement accounts that offer an “uncertain future value” versus “certain future financial security.”

WELL SAID!!! Read the entire letter here.

1 comment:

Anonymous said...

Consider the following criteria for making investment decisions:

1. Choose a level of risk.
2. Find the highest returning investment for that level of risk.

SS is considered to a risk-free investment (in theory anyway). That means no uncertainty regarding future value at retirement and zero probability of default.

So, Americans should invest in the highest yielding risk-free investment available. Consider the following fact: For me (a 41 year old male), I will earn less than a 2% annual return on SS (if it remains solvent), probably a lot less. On the other hand, in the 2/16/05 Wall Street Journal, a 10-year Treasury note yields 4.11% (and of course it is default risk free). Even a 3-month T-bill yields 2.59%!

If I were to invest in Treasury securities, I would have more money at retirement than I will have under SS. And, if Americans could have invested in T-securities from the beginning, we wouldn't be having conversations over SS solvency.

SS is a defective system that must be overhauled/replaced.