Now that President Bush has another four years to promote his vision of an "ownership society," the possibility of privatizing Social Security is much more real. Some have expected that if Social Security were privatized -- that is, if Americans were given the responsibility of investing money for their retirement on their own -- the mutual fund industry would benefit. That's not such a sure thing, though.
It's true that mutual funds seem like obvious winners. After all, if millions of Americans suddenly have moolah to invest, mutual funds are rational and reasonable recipients for investment dollars. But there's a possible downside to the scenario: costs.
The average American won't be investing a lot, at least not in the early years of a privatized program. A recent Reuters article noted that, "The administrative costs for managing accounts that for the most part will hold less than $1,000 in the first year suggests mutual fund companies could easily lose money for at least several years..."
Of course, what form this possible privatization might ultimately take remains far from clear. The government might offset certain costs borne by the mutual fund industry -- maybe at least in the early years of the program. Or perhaps the mutual fund industry will be bypassed to some degree, as investments are steered in some other direction(s).
Other questions and issues remain. For example, will there be any kind of safety net for investors if the market swoons for a very long time or certain mutual funds fail? Will there be any kind of guaranteed minimum return? Will investors be able to find investments that perform like Starbucks (NASDAQ:SBUX), or will they end up with portfolios filled with troubled firms with uncertain futures, such as Kmart (NASDAQ:KMRT)?
The greatest challenge may lie with the investors themselves. Most simply will not be equipped to manage their own retirement funds. The average American investor may not understand why Dell (NASDAQ:DELL) is a more compelling investment in many ways than Kodak (NYSE:EK). Because of inexperience and a dearth of education regarding investing, many Americans may end up taking on too much risk or too little, or signing up for investments that charge too much in the way of fees. They may panic easily and trade too frequently, impatiently selling this and buying that. (Here are lots of common investing mistakes that I've made, much to my regret.)
Prepare yourself, America. Keep learning about investing, as you may really need this information soon. Here's a long page of educational resources. You may want to check out our suite of investing newsletters, too -- they offer compelling investment ideas, educational nuggets, and free trials. We even have one focused on retirement success.
Also, share your thoughts on Social Security on our Social Security Reform discussion board -- or just drop in to see what others are saying. Here are some Fool articles that shed more light on the topic:
- Six Social Security Myths
- Why I Hate Social Security
- Why You Hate, and Like, Social Security
- What You'll Get From Social Security
- The Only Way You'll Retire
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
