[Marxism] How to Defend Social Security
acpollack2 at juno.com
acpollack2 at juno.com
Wed Dec 22 17:19:05 MST 2004
a supplement to Yoshie's piece on defending Social Security, from today's WSJ (have to paste the whole thing as you need a sub otherwise):
December 22, 2004
Model Reveals Social Insecurity
By TOM LAURICELLA
Staff Reporter of THE WALL STREET JOURNAL
December 22, 2004; Page C1
Until recently, few people aside from federal employees and members of the military had ever heard of the Thrift Savings Plan, the government's version of a 401(k) retirement program. Now, it is being touted as a model for the private investment accounts that are central to the Bush administration's proposal to revamp Social Security.
"People are not going to be allowed to take their own money for their retirement account and take it to Vegas to shoot dice," President Bush said last week. Any investment accounts, he added, would be "similar to the thrift savings plans that we federal employees have available to us now."
Treasury Secretary John Snow also cited the Thrift Savings Plan in discussing private accounts, saying on "Fox News Sunday" that "these are going to be safe investment vehicles."
By investing on their own, proponents say, Americans should be able to earn more money for retirement over the long haul, even if they have short-term losses, than the minuscule returns earned in the current pay-as-you-go Social Security system. Critics say individuals will make poor investment decisions, even with restricted choices, and could leave the federal government on the hook to make up shortfalls caused by losses in the markets.
A look at the TSP shows that the limited menu of investment options -- the TSP offers five options, less than half as many as the typical corporate 401(k) retirement plan -- doesn't protect participants from losses in the stock or bond markets. Nor are participants insulated from making the common investing mistake of chasing hot performance and, as a result, buying when prices are high and selling when prices are low.
Data from the TSP show that, while the vast majority of participants leave their investments alone, those who made changes in recent years rushed to buy stocks at the height of the bull market. Then, after stock prices collapsed, participants moved out of their stock funds and into bonds, potentially locking in their losses. In addition, as stock prices moved lower during the bear market, many participants reduced their monthly contributions to the TSP's stock-fund options. Financial advisers generally say investors should stick with an appropriate investment strategy and not overreact to the market's ups and downs.
"Safe is not an adjective I would use" to describe the TSP investment options, says William Shipman, chairman of Carriage Oaks Partners LLC, co-chair of the Cato Institute's Project on Social Security and a backer of private accounts who advocates an initial limit on workers' exposure to stocks. Just because an investment option is an index fund "does not get around the risk" of the underlying investments.
Indeed, while some lawmakers advocating private investment accounts would essentially cut and paste the investment options of the TSP, others would limit an investor's exposure to stocks, thus limiting the potential for losses, but also likely limiting long-term returns as well.
Created in 1986, the TSP today has 3.4 million participants and holds more than $147 billion in assets. Of its five investment options, four are index funds managed by Barclays Global Investors, a San Francisco-based unit of British banking giant Barclays PLC. The TSP was launched with just three options: a portfolio based on the Standard & Poor's 500-stock index, an option tracking a Lehman Brothers bond-market index and a fund in which participants' money is invested directly in short-term U.S. government securities. In May 2001, the TSP added a fund that tracks an index of small-company stocks and an international-stock index fund.
The TSP often wins praise for extremely low fees. In 2004, the total cost to participants has been a meager 0.06% of assets, which would amount to just $6 in fees on every $10,000 invested through the plan. Even by the standards of low-cost index funds, that's a bargain. The average index fund charges investors $78 on every $10,000, according to Morningstar Inc.
The TSP data show that, in December 1999, just three months before what would prove to be the peak of the stock-market bubble, some TSP participants shifted money out of bonds and into stocks. Transfers between accounts jumped to nearly twice the pace of the previous 11 months, representing about 2% of all TSP participants at the time. A net of $427 million was pumped into the TSP's S&P 500-stock index fund that December, with $276 million coming out of the bond portfolio and $151 million from the bond index fund. The following month, January 2000, another $728 million was moved into stocks.
That March marked the top of the market and the beginning of the long downturn in which the TSP's S&P 500 stock fund lost an average of 14.4% annually for three years. But for much of 2000, TSP participants continued to move money out of bonds and into stocks -- until they received their December statements reflecting the stock market decline since March.
For most of the next three years, TSP participants pulled money steadily out of stock funds, with some of the heaviest withdrawals occurring in the months surrounding steep downturns in stocks during 2001 and 2002. From June through October 2002, when stock prices hit their lowest levels, TSP participants yanked $3.8 billion out of the S&P 500 stock fund, an amount that was roughly 8% of assets in the stock fund at the beginning of the year, and shifted mainly into bonds.
The two bond portfolios in the plan had returns ranging from 5% to 10% in 2001 and 2002, while the stock funds posted big losses. But in 2003, returns on the bond portfolios averaged around 4%, lagging far behind the stock funds. The TSP's S&P stock fund gained 29% that year, the international fund jumped nearly 38% and the small-cap fund surged nearly 43%.
There was also a pronounced shift in contributions as the stock market rose and fell. In January 1997, 50% of participants' monthly contributions went to stocks. But by the time stocks hit their peak in March 2000, participants had increased their stock market allocation to 66%. As stock prices fell, participants steadily reduced their contributions to stocks and by the end of 2002, 47% of participants' money was going to stocks.
While the TSP forces participants into more diversified portfolios than the typical 401(k) plan, "there doesn't seem to be any substantial difference" in how participants in the plans respond to the market's ups and downs, says Dallas Salisbury, president of the nonpartisan Employee Benefit Research Institute. Participants, he adds, can't be protected "in the total sense."
Write to Tom Lauricella at tom.lauricella at wsj.com1
URL for this article:
-- Yoshie Furuhashi <furuhashi.1 at osu.edu> wrote:
"How to Defend Social Security":
* Critical Montages: <http://montages.blogspot.com/>
* "Proud of Britain": <http://www.proudofbritain.net/ > and
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