A Patriots Manifest June 12 2008
William White
While Social Security is the main income program there are tons of them and solutions from on high are not going to work. They will not work because there are too many hidden assumptions that are just plain wrong. Rather than go into the details of all the different plans for saving social security let’s just assume that a conversion to the British/Chilean system is worked out: the same amount of money is taken out each pay-packet but the individual invests it themselves. For small economies and especially over short periods of time this works out very well. In the US about 1-2 trillion dollars would go into the investment markets annually for roughly 43-86+ trillion dollars carrying capacity. That’s based on a 45 year working life and 3% gdp growth rate. Besides obvious questions of timing: are the accounts credited monthly, quarterly or some other way that can make hedge fund investors very rich, very fast at very low risk there are other problems besides what to do with enough money to terraform Mars and Venus thus creating wealth literally beyond imagination.
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1%= 64.461
2%= 84.577
4%= 152.664
8%= 573.756
16%=10435.449
(Source “Fundamentals of Investing” 1984 Gitman and Joehnk table B-4)
When you get to the normal range of individual investing, 8%+, an extra hundredth of a percent yield is big time. Yield differences fill entire books: “Beating the Dow” by Michael O’Higgins or “The Dividend Rich Investor” Tigue & Lisanri to name two I keep on my desk. Underestimating the importance of yield over time is a common error even among professionals.
Risk can also catch up with the investor in unexpected ways. I list “Beating the Dow” above because O’Higgins has a formula for maximizing risk adjusted return by putting 100% of funds in one stock.. That freaks out a lot of people. Michael Milkin’s partner who was in with him on every deal was never jailed, tried or even indicted. Michael copped a plea to keep his elderly father out of jail for tax evasion. There is no evidence that the risk adjusted returns on “junk” bonds are any worse than buying treasuries quite the contrary in fact, which was the problem. Why buy treasuries at 3-6% when you can buy a convertible bond at 5-8%? True for bonds either rated BB and less or that are on rating watch 20 or more positions from different issuers are needed for protection from default but the returns generally justify buying a junk bond fund as opposed to treasuries anywhere but at a market top.
Current conservative/constitutionalist/libertarian/social Darwinist plans for transition to private plans to replace Social Security won’t work because they are too busy and too cute. They miscompute yield, risk and many other factors. The previous two drafts of this column tried to hit the high points and blew four days out of the water with what looked like the expanded version of “Gone with the Wind” even in outline. I strongly advise lotteries to fund buyouts of social security and letting politicians be politicians and not economists.
The views expressed by William White are his and his alone and may not be the views expressed by A Patriots Manifest. Thank you .... Michael Roller...