Should you be trusted with your own money?
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Cheerleaders for privatizing Social Security often say about the opposing team, "They don't trust you to invest your own money." Score one for melodrama but zero for relevance.
It's like telling me that I cannot be trusted to pilot a Boeing 747. This is not a matter of trust. It is a matter of exhaustive training and at least 20 years of flying experience. Only my enemies want to see me get behind the controls of a Boeing 747.
Now some people can fly the jumbo jet. And many more can successfully maneuver through the financial markets. Neither navigating skill, however, appears in great abundance among the general population.
The cheerleaders say not to worry. Workers who invest their Social Security contributions will not really be taking over the controls. A professional money manager will steer. All the workers will do is to choose from a list of "government-approved" funds.
Wonder what investment companies will get on that list. Could it be the same Wall Street folk now raising millions to support privatization efforts? The investment companies have formed the nicely named "Coalition for American Financial Security" to bombard the public with advertising in favor of privatization.
According to one estimate, 2 percentage points of the Social Security payroll tax would bring Wall Street about $86 billion worth of investment business in 2002 alone. That could translate into some very nice Christmas bonuses.
Only 38 percent of the respondents in a new poll say they want to privatize Social Security, but minds can be changed. After all, many working Americans have yet to meet Henry Blodget.
Henry Blodget was Merrill Lynch's star stock analyst. The boyish redhead virtually lived on CNBC, where he sang the praises of Internet companies with minus-zero prospects for earnings. Their stock prices took off on his recommendation.
As it happened, the market bubble burst. From the beginning of last year through early March, Blodget's top stock picks averaged losses of 79 percent. And to think that only five months earlier, the industry had honored him as stock analyst of the year.
Just around that time, investors began noticing that Blodget was touting some of the same stocks that Merrill Lynch's investment bankers had been underwriting. Some complained. Last month, the Securities and Exchange Commission warned investors to look out for that sort of thing. I certainly hope that the chambermaids and farm hands putting their future Social Security benefits in stocks will keep an eye out for SEC advisories.
Anyone who thinks the American masses should be sent into this environment might consider the recent performance of 401(k) retirement savings plans. These tax-deferred investments allow workers to put some of their pretax earnings in stock, bond or money market funds chosen by their employers.
The 401(k) participants comprise a relatively sophisticated group. They come from households with a median income of over $50,000. Some 45 percent have college degrees, and 39 percent manage other investments not provided by their employer.
For the first time, 401(k) plans ended a year with less money than they started. The average account in 2000 fell to $41,911 from $46,740. Keep in mind that the participants had been stoking their accounts during the year with thousands of dollars in fresh contributions.
What had they done wrong? Many were putting too much of their money in stocks and not enough in bonds — probably in response to the tech stock mania of the late '90s. And even mainstream funds had piled up on risky technology stocks that subsequently crashed.
Some 401(k) investors put too much of their money into the stock of their employer. A prudent investor would spread that risk among several stocks.
A Continental Airlines pilot confessed his inexperience to a New York Times reporter. He had placed all of his 401(k) money in two stock funds. One of them was a technology fund, which lost half its value.
Here's a fellow who would probably do a fine job behind the controls of a 747, but he had something to learn about stock investing. Lucky for him and for us that we have Social Security to fall back on should all else fail. May Social Security always be boring and its benefits guaranteed.
Froma Harrop's column will appear regularly on editorial pages of The Times. She can be contacted via e-mail at fharrop@projo.com.