Remember the Bush Administration's push to partially privatize Social Security? The privatization advocates warned that insolvency loomed unless dramatic changes were made to the system. Social Security was also labeled a terrible investment. The Bush team's argument: Let people invest a portion of their payroll tax money with the financial wizards of Wall Street in an account reminiscent of a 401(k). Workers would get a higher rate of return on their Social Security money, and the economy would benefit from a higher rate of savings.
"We heard the fear that Social Security will go bankrupt and the solution is privatize it," says Zvi Bodie, a finance professor at Boston University. "Yeah, right! It was a self-serving proposal from industry."
Imagine Bear Stearns, Lehman Brothers (LEH), American International Group (AIG), and other titans of finance managing Social Security? The late economist Robert Eisner told me during an interview in the early 1990s that "Social Security was not meant to be a get-rich scheme or a competitor to go-go funds." He was right.
So Many Responsibilities
Question is, in light of the current turmoil in the financial markets, should Wall Street manage any of our long-term retirement savings funds? Is the 401(k) plan, which has become the main retirement savings vehicle for the American worker over the past three decades, a mistake? The case for rethinking the 401(k) as a pillar of retirement savings is compelling.
To be clear, the democratization of stock ownership is a welcome and powerful trend. Two hundred years after 24 New York brokers and merchants met on Wall Street to sign the "Buttonwood Agreement," a pact that established standard commissions for trading securities, investing now has all the characteristics of a mass social movement. People's Capitalism has helped fuel entrepreneurship and risk-taking. Despite abuses, stocks options, restricted stock, profit sharing plans, and similar equity-based compensation schemes are critical building blocks to innovation, the driving force behind economic growth. Thanks to the Internet and advanced telecommunications networks, it's cheaper than ever for individual investors to buy securities.
No, the question is focused on retirement savings, the money employees set aside during their working years to smooth out their standard of living in retirement. Employees bear all the responsibility if they make mistakes, and time to make up for investment mishaps shrinks as stomachs go slack and hair turns gray. It's an axiom of modern finance that the only way to create the possibility of higher returns is to take on greater risk. But the risks employees are absorbing today seem disproportionate to the potential rewards.
For one thing, most employees work for companies that demand more of their time and effort, and that effort is showing up in high productivity numbers. For another, most people not only work but they also raise families, help their children with homework, spend time with friends, volunteer in the local community, vote in elections, and try and maintain their health with exercise and eating properly. At least, even if they fall short, these are all things they try to do and are encouraged to do. Yet, on top of all that, they're supposed to know how to allocate investment assets for when they retire in 5, 10, 20, or 30 years from now.