Which Is Scarier: The Government, or Your Mom?

This week's column is (yawn!) Social Security privatization. The newspaper version is available here.

But first, this past Saturday was the El Tour de Tucson 111-mile bicycle race and, avoiding the "wardrobe malfunction" (the cleat coming out of my shoe) that afflicted me in 2000, I finished in the "gold" category at 5:48:16, which is a bit more than 1.5 hours better than my previous time. (That's 934 out of 3692 unofficial finishers.) A special shout-out to my cousin Andrew Fredman, who flew in from Westchester County and finished somehow in the "silver" category, in his second century ride this year. Finishing times are available here; use your browser's edit/find feature if you don't feel like scrolling through nearly a thousand names before you get to your happy correspondent. So that means this year I've done 2 century-plus rides (each about 110 miles--and who decided that the additional 10 miles was a good thing?) and a marathon. Telling you? As the joke says, heck, I'm telling everybody!

UPDATE: Revised (but still unofficial) results have me finishing 898 out of 3567 instead of the numbers in the previous paragraph. Also, here's a photo of me at the Sabino Creek crossing about 45 miles into the ride.

Finally, the inside joke in this column is that the Andrew Tobias column was printed in the January, 1986 edition of Playboy. Yes, I must have read it for the articles.

PRIVATIZATION - A RELATIVE RISK
You may be a whiz at picking investments, but what about your market-unsavvy kin?
East Valley Tribune, Nov. 21, 2004

Maybe you can handle Social Security privatization. But can your relatives?

Ignore the trillion-dollar costs of transitioning from pay-as-you-go system, or how transferring funds to private accounts only accelerates when the system can’t pay boomer retirements. Forget about the transaction costs of managing millions of small accounts.

Before you start salivating at Social Security privatization, remember that you’ll need more than the investment expertise necessary for your own retirement. You’ll also need to generate returns large enough also to cover your relatives’ losses on their private accounts.

If you think you’re up to that challenge, then congratulations -- but if so, why not quit your current job and start running a hedge fund?

Every single American believes that he or she is (1) an above-average driver and (2) an above-average investor. It almost goes without saying that you must certainly be both. However, your mother and father (or, for older readers, your son, daughter, and son-in-law) also firmly believe that they are above-average drivers and investors. You may know better. But they’d still get their own private account and be responsible for investment results.

Maybe your mother really is an above-average driver. And maybe she’s the Queen of England. But if mom isn’t really a stock market expert, then her Social Security payments after privatization won’t be as much as she’d expected. And at that point, she’ll be looking at you kids to help her out.

It’s one thing to be a savvy enough investor to sock away enough for your own retirement. If you think you’re savvy enough to cover both your retirement, and also make up for your son-in-law’s pigheadedness, then remember that the Greeks had a word for that attitude: Hubris. Maybe there’s a free lunch for you. But for your parents and kids as well? That’s a lot of free lunches.

Don’t assume that the government will step in to protect people from their investment errors. If there’s a guarantee that no matter how badly mom does with her investment choices she’d still get at least as much as she would have gotten under traditional Social Security benefits, it will cost a bundle to make up for millions of mistakes -- increasing the already trillion-dollar transition costs.

More importantly, it means that privatized accounts would come with a “heads you win, tails we lose” government guarantee, encouraging millions of investors to take lots of risks. If your bet pays off, you win. If the bet fails, the government comes to the rescue.

Unless (for some unfathomable reason) we want people to invest their privatized accounts in companies which buy lottery tickets, knowing that there’s a small chance of a huge windfall but little downside, because basic benefits are guaranteed anyway. We tried that once; it was called the S&L bailout. There’s little need to try it again with 150 million little S&Ls.

Back in 1986, Andrew Tobias wrote a tongue-in-cheek column describing how he had invested $2,000 in his IRA during the previous year. He bought one obscure company that went from 50 cents to 1 5/8 a share, then some more stocks that went from 17 to 24, and sold puts on stocks that declined from 14 to 10 and 23 to 14 ½. (Of course, if you can decide what you should have bought and sold after the fact, it’s amazing how well you can do.)

Still, the vast majority of his “gains” came from a stock tip he got from some CIA guys, who had decided to quadruple quietly the stock of an obscure electronics company as a way to pay off certain persons whom it might be embarrassing to pay directly; they’d just be told what stock to buy. It took months, but shares bolted from 2 1/8 to 10. Bingo! On December 31, Tobias supposedly could retire on his IRA.

If you served in the Agency -- or get the chance to buy a piece of the Texas Rangers franchise on the cheap -- then sure, privatization makes sense. You’ll make enough to cover your “above-average” mom, dad, and kids. For the rest of us: Are you kidding?