Utterly Meaningless » Blog Archive » OT: TANSTAAFL

    Filed at 4:14 am under by dcobranchi

    An interesting column in the NYT on Social Security privatization. There is no proposal yet to bash so this is a pre-emptive shot. He’s right about risk and reward. Equities have historically yielded more than Treasuries because of the “risk premium.”

    “The entire argument is absurd,” said William C. Dudley, chief United States economist at Goldman Sachs. “These returns weren’t free. You are getting these returns precisely because you are taking on risk.”

    I’m not sure I buy the SSA’s contention that P-Es will increase over time, either. They currently sit about 50 percent above their historical average. A prediction of a significant P-E expansion beyond that range seems dubious at best.

    And one other thing- this entire debate is aimed at “fixing” Social Security as the boomers get set to retire. Well, I’m at the tail end of that generation (I was born in ’62; the “official” end is ’64) and I am already in the market. In fact, I play the extreme edge of risk (I’m a “momo” player) with my accounts. I would not dedicate any portion of my Social Security account to the stock market. Why? Because it’s the zero risk portion of my three-legged stool. My 401(k) and IRA are high-risk/high potential reward. My DuPont pension is theoretically zero risk (but it can always be changed by the company) so I hedge my bets with the zero risk Treasuries in SS. Is it truly zero risk? No– Congress can (and does) change it at times. But history shows, I think, that it’s a pretty safe bet.

    So, if I, being a gambler and a fairly knowledgeable baby boomer with a long-term horizon wouldn’t play this, what are the chances that anyone older than I will?

    I look forward to seeing whatever Bush finally proposes. So far, I haven’t been impressed with the trial balloons.

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