Can You Be Trusted With Your Money?[Fool on the Hill] June 7, 2000

An Investment Opinion

Can You Be Trusted With Your Money?

By Bill Mann (TMF Otter)
June 7, 2000

Al Gore thinks you're not qualified to manage your own money.

That's the message I take from him in this current presidential debate about Social Security. Beyond any of the realities of what Social Security is, what it does for people, or how it should be administered.

George W. Bush has proposed letting Americans invest a limited amount of their Social Security in stocks and bonds. This would set aside one-sixth of the 12.4% Social Security payroll tax employees pay to be placed in self-managed individual investment accounts.

Al Gore reacted to Bush's proposal by saying that letting workers invest in the stock market is far too risky, comparing stock market participation with playing roulette. He objected that "tens of millions" of Americans were incapable of making investment decisions, and that workers who happen to retire during a bear market would risk seeing much of their retirement funds disappear.

Did you get that? You, Joe Bag of Doughnuts, are incapable of making financial decisions, and should allow the government to continue to do it for you.

Mr. Gore is saying that your ability to make proper investment decisions is apt to be so bad that over the span of a 40 to 50-year work career that you will be unable to manage enough asset appreciation to meet the needs of your retirement. Even if the program were limited to some select mutual funds -- not the most Foolish way to invest to be sure, though the inclusion of an S&P 500 index fund would give you access to 500 of the biggest, most profitable bastions of American commerce.

There is no such thing as a "100% guarantee," but the chance of the companies in index causing your retirement to disappear over the long term is about the smallest non-zero positive number possible. And yet Mr. Gore, most likely for political gain, is coloring tens of millions of us to be financial imbeciles who need to have these decisions made for us. His language shows a basic incomprehension of one of the core institutions of the American economy: the stock market.

Having spent a few too many days amongst the lobbyists and pollsters and policy wonks early in my career, I don't wander lightly into political discussions. I still recall a latter-day Lady Macbeth response to some pretty shady influencing I witnessed; I wanted nothing more than to wash the hypocrisy and collective ego of Washington off of me. But this is an issue that I can really get behind -- the fact that someone somewhere near Washington, D.C. has seen the wisdom of letting us manage our own money. I say, "Bring it on!"

There's a strange symmetry between Gore's views and something that the Fool has been advocating for years: Maybe we wouldn't seem like a society of financial morons to you if the American public school system was adequately teaching personal finance.

But that would be cynical. It is true that there is a vast universe of Americans who have not yet entered into a minimum level of financial facility. But this number is shrinking, and the reason has as much to do with the spread of 401(k)s, 403(b)s, and IRAs as it does the rise in the stock market, or even the educational efforts of The Motley Fool.

According to the Cato Institute, the real rate of return for the average worker from his or her Social Security investments over the last 30 years has been less than 1% per year. As the next generations become responsible for providing for the large number of retiring Boomers, even this anemic rate of return under current Social Security methodology is probably optimistic. In fact, there are several groups of Americans for whom Social Security is already a negative investment.

Even the most staunch defenders of Social Security's status quo recognize the fact that it is on a collision course with insolvency sometime in the next few decades. In view of the demographics of an aging America (the Bureau of Labor Statistics puts the over-65 population growth at 85% between 1998 and 2025), one (or more) of three things would have to happen: the amount withheld will have to be increased; the amount disbursed, either through reduction or raising the retirement age, must be decreased; or the money held in trust by the Social Security must yield higher returns. The first two paths are distasteful to large portions of the population, signifying, once again, for all of Americans' stated affinity for fewer government programs, that we still like to have a state-supplied safety net.

I've got no problem there. But the pay-as-you-go system (in which the majority of Social Security withholdings of the employed are going directly to pay the benefits for current recipients) has created an inefficient system that provides nearly none of the magic of compounding interest, since money flows out as fast as it comes in. But Mr. Gore would rather play the politics of fear than address the issue of the real financial threat of Social Security's insolvency.

Two of the key points in Bush's proposal are that current and soon-to-be recipients will be guaranteed to receive what they have been promised, and participants electing for an investment account would be guaranteed a minimum of the same return available under the current system. The "risk" under this scheme is not to American investors, nor to Social Security recipients. Rather, it's to Al Gore and his views that we are incapable of making prudent decisions, that we are sheep needing a shepherd.

This flies in the face of facts, borne out not only in the participation of some 2 million unique visitors here at The Motley Fool, but also in the fact that some 80 million American households are investing, up by 40% from a decade ago. The S&P 500 has never failed to rise over any 20 year period since it was created, nor has any other kind of investment outperformed stocks over any 20 year period. The average annual return of the S&P 500 has been 11%. This means that, if a 20-year-old has $1000 withheld from her paycheck, under the current Social Security regime her return would be just over $1900 at age sixty-five. If she is allowed to invest in the S&P 500? Her return is in excess of $98,000.

And the stock markets are not only the domain of the wealthy. According to the New York Stock Exchange, an estimated 10 million families with incomes of less than $25,000 per year own stock. More than half of all stockholders have incomes of less than $50,000 per year. And the racial divide on this issue is non-existent, with 62% of African-Americans and 62% of Hispanics -- as compared to 66% of all Americans -- who want some personal control over investing their payroll taxes.

I'm with them. Even if the selections for investing are limited to bond, stock, or mixed funds, I'm game. Given the choice between static to negative returns with current management or almost assuredly higher returns with the bastions of American commerce, to my mind it's no contest. I'll entrust my retirement every single time to companies with histories of creating shareholder value -- an AIG (NYSE: AIG), an Intel (Nasdaq: INTC), an America Online (NYSE: AOL), a McDonald's (NYSE: MCD), or a Yahoo! (Nasdaq: YHOO), even if I can't choose them directly.

Social Security reform is something that is politically sensitive and deadly important. Several countries, including the socialist wonderland, Sweden, have enacted some form of privatization of their pension plans. Since U.S. federal employees were given direction over their retirement funds, they have put over $90 billion dollars into stock funds, a move co-sponsored by Al Gore.

Stocks and bonds are not "too risky" for federal employees, but they are for the rest of us? Gore isn't even on the same page as many of his Democrat colleagues: Senators Bob Kerrey (D-NE) and Daniel Patrick Moynihan (D-NY) proposed giving employees control over a portion of their payroll taxes in a fashion remarkably similar to the one proposed by George W. That Bush has taken ownership of this issue speaks volumes about the shift in political discourse: the conservative candidate is the one promoting Social Security as a populist issue.

Please take the time to respond to this brief poll on Social Security. We'd like to know what concerns you have with the positions of either major presidential candidate, or if you have your own ideas. We also have a dynamic Retirement area at the Fool for discussions of interest to current and future retirees.

Fool on!

Bill Mann, TMFOtter on the Fool Discussion Boards

Related Links:

  • "Reform Social Security Now!", TMF Retirement Portfolio
  • Social Security Reform Discussion Board