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Today's Commentary: Week Ending 12.18.04
Six Questions about Social Security
What exactly is meant by privatization? The idea behind privatization seems simple on the surface. It would allow people create private accounts that would be theirs alone, a pay in and watch it grow program that is much the same as a 401(k) plan and similar retirement programs sponsored by companies.
These types of plans have been successful for two reasons: One, it removes the burden of liability from the company and their profit and loss statement dropping the responsibility squarely in the laps of their employees and two, they create a new investor class. But by creating this new group of investors has not necessarily meant that the employee has done well because of this shift in how companies take care of employees and their retirement.
Creating a new investor class the way this program has done has instead allowed companies to wash their hands of any retirement obligation. Forcing folks to find out where to put their retirement savings although has not been as successful for the employee.
The some of the former benevolence of the company sponsored pension plan has carried over into these plans as employers offered matching funds to encourage employees to take advantage of these programs. Problem was, these funds were mostly squandered as employees picked restrictive matching (i.e. when the company matches on company stock only) or failed to chose the right fund for their investment goals. Many defined contribution plans offer a default fund if the employee fails to decide how to allocate their money. This is often a low yielding money market fund that has languished for years beneath the weight of current monetary policy.
Although some education gains have been made in correcting these investment mistakes, the average employee is still under invested and largely misdirected when they finally do participate.
That is the downside of privatization - a term that supposedly does not poll well. In the President's plan, accounts similar to those offered by private industry will be created. These have been promised to somehow be better directed and offer more security. Don't count on it.
The markets have continued to fascinate us. We tune in to the goings on from Wall Street with either envy or confusion. For every report on the future of the markets and their cheerleaders who see nothing but blue skies and sunshine ahead, there are those, like me, who seriously doubt the direction of the markets.
Tying private accounts to the stock market is risky business and may not have the returns that are currently being touted. Citing historic returns in this era of soaring deficits, globalization, concerns over the economic disruptions resulting from terror may not be the wisest approach to instilling confidence in the average worker who may still see the Street as the den of robber barons.
Would you be able to invest if your retirement was your responsibility?
The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.
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