Interesting article on the stock market impact of money flows from social security moving into the stock market:
yahoo.smartmoney.com
I say "home" because stocks are the natural place to invest for people with very long time frames — such as people investing for their retirement. Right now all that Social Security retirement money is invested in intermediate-term Treasury bonds, and any financial planner would tell you that's just plain bad asset allocation....
Today, polls consistently show that most younger Americans don't believe they will ever get their Social Security benefits when they retire. For them, all those taxes are perceived as just a deadweight loss. With personal accounts, workers know they will get something out of Social Security when they retire — because they can see their account growing every day. And it's their account — their property.
Full article:
You Say You Want a Revolution?
By Donald Luskin Published: January 14, 2005
IMAGINE FOR A MOMENT that George W. Bush somehow manages to accomplish the politically impossible and succeeds in overhauling Social Security. I've been dreaming of and writing about the possibility for years. In fact, my first SmartMoney.com column way back in 2001 was on this very topic. While my thinking has matured somewhat since then, the promise of a rejiggered system has stood the test of time. And if a portion of the money held in Social Security accounts does indeed find its way into equities, it'll prove to be a transforming event for the stock market — like the 401(k) revolution of the 1980s and 1990s, only bigger.
Even a modest personal-account program would have a profound impact. Under one of the proposals of 2002's bipartisan President's Commission to Strengthen Social Security, 4% of wages (with a maximum of $1,000 annually) could be voluntarily contributed to a personal account, rather than to the Social Security trust funds. If every eligible participant did this, and if it all went into stocks, then in the first year of the program $92 billion in buy orders would hit the equities market. The cumulative value of stocks bought by Social Security participants would be over $1 trillion by 2016 and $5 trillion by 2043.
But in 2043 those stock holdings would likely be worth much more than $5 trillion. For one thing, that figure is in 2004 dollars — so with even a little inflation, it would be noticeably more. But more important, that $5 trillion figure doesn't include any market returns. It's just the cumulative value of the amount invested. Over forty years, the market — not adjusted for inflation — will likely have grown many multiples of its current value, and so will those Social Security investments. By 2043, those investments could be worth more than $70 trillion in 2043 dollars, assuming reinvestment of dividends. And think about this: A large percentage of that will be held by people who have never owned a stock in their lives.
How did that Beatles song go? "You say you want a revolution..."
But would everyone really opt for personal accounts if they were available? There's some evidence that the adoption rate would, in fact, be very high. The Thrift Savings Plan, which is, in essence, the 401(k) plan for federal government employees and the largest defined-contribution retirement plan in the world, has about 86% participation. And would everyone who opts for personal accounts really invest it all in stocks? Surely not, but participation would likely be substantial. About 53% of the money in the Thrift Savings Plan is in stocks.
So put it all together and you get about half way to the mega-numbers I'm talking about. And when the numbers are that big, even half way is a long way to go.
What can we expect will happen to stock prices if all this new money starts coming into the market? One thing we know for sure, all this new money to spend on stocks sure isn't going to make the market go down. As far as I'm concerned the only question is, how much will it make the market go up?
I'm not even going to try to answer that question with a specific number. The influx of money into stocks on behalf of Social Security personal accounts would take many years, and there would be plenty of other things going on over those years that would affect stock prices just as much, if not more.
But holding all those factors equal, let's talk about what we do know will happen. We know that billions — and soon enough, trillions — of dollars will find their way home. I say "home" because stocks are the natural place to invest for people with very long time frames — such as people investing for their retirement. Right now all that Social Security retirement money is invested in intermediate-term Treasury bonds, and any financial planner would tell you that's just plain bad asset allocation.
That means that, today, there's money that should be in stocks but can't be — which means, by definition, that stocks are cheaper than they ought to be. That's because when the natural holders are barred from buying stocks, somebody else has to hold them. And to induce all those somebodies to do so, stocks have to be a little cheaper than they would otherwise be. Or, using the same logic, there are companies that haven't gone public — or perhaps don't even exist — because the money they needed was artificially sidelined. When that money comes home, stock prices will rise, more companies will be able to go public, and more new companies will be created.
I'm saying two very bullish things here. First, Social Security personal-account money will make stocks that already exist go up. Second, and more importantly, higher stock prices and more availability of equity capital will increase economic growth. That means more jobs, higher earnings and a cycle that drives stock prices higher still.
And there's a third bullish element, too. Today, polls consistently show that most younger Americans don't believe they will ever get their Social Security benefits when they retire. For them, all those taxes are perceived as just a deadweight loss. With personal accounts, workers know they will get something out of Social Security when they retire — because they can see their account growing every day. And it's their account — their property.
Higher confidence about receiving benefits in the future amounts to a tax cut — or to say the same thing another way, a pay raise. And when you pay people more, they work harder. And when people work harder, the economy grows faster. More fuel for the virtuous cycle.
Social Security reform is this year's political football. It's hard to talk about it without engaging people's worst partisan impulses on both sides of the debate. But try to set all those emotions aside and just think like an investor. Even if you think personal accounts are a terrible idea, it remains a fact that they are very bullish. So feel free to oppose the idea with all your might. But when you see that it's actually going to happen — even over your objections — just make sure you're long the stock market. |
