Keep Social
Security
Out of the Market
by Sy Harding
Editor, Street Smart Report Online
After
the 1929 stock market crash, it was clear that people were going
to have mixed results providing for their retirement through
their own saving and investment efforts. Younger people would
have time to recover from periodic market declines, but what
was needed as they got older, and for those who were already
older, was a basic government-guaranteed pension. Never mind
a 90% market decline as had just been experienced, even a 40%
bear market, occurring just after a person had retired, would
obviously produce devastating results if all they had was their
private investments. The Social Security Act was passed in 1935
to provide that safety net.
No one dreamed of then
turning around and putting Social Security assets at the same
risk in the stock market. That would have defeated the purpose.
On the contrary, it was to be the guaranteed safe portion of
a person's retirement funding. Anything further they could accumulate
through savings and investments, or through pension plans provided
by employers, would obviously grant a more comfortable retirement
than depending solely on Social Security.
However, in the 1950s
came the first long-running bull market since the 1920s, and,
as the old saying goes, there's nothing like a bull market to
make a person believe they've become an investing genius, and
Congress was not immune to coming up with that opinion of itself.
So, forgetting that
it was the painful result of having financial security too dependent
on the stock market that prompted the need for Social Security
in the first place, discussions began about placing Social Security
assets in the stock market, to take advantage of the larger gains
that could be made there.
The thought hardly
began to build a head of steam when it was knocked on the head
by a ten-month market decline in 1960, immediately followed by
a seven-month bear market in 1962, back-to-back losses of 18%
and 27%.
Thereafter, the stock
market returned to its long-term pattern of bull markets lasting
an average of two or three years, each interrupted by bear markets
that lasted an average of 14 months. There was no further talk
of placing Social Security assets in the market.
However, forty years
later, in 1998, after the current long-running bull market had
been underway for eight years, again producing the belief that
the stock market was a safe, perpetual-motion, money-making machine,
Congress again began discussing the wasted opportunity of not
having employee and employer contributions to Social Security
invested in the market.
Wall Street spurred
them on, salivating at the prospect of an additional $400 billion
a year passing through their hands.
Again Congress proved
to be very poor with their market-timing efforts. No sooner did
such talk heat up than the majority of stocks topped out and
headed south.
Even famed long-time successful manager Warren Buffett could not avoid a plunge of 48% in the value of his investors' holdings, even though in conservative stocks like Coca-Cola and Gillette, considered to be safe from the market's gyrations.
Recently came reports that equally successful hedge-fund manager George Soros has lost $5 billion of his investors' assets in his long-time successful Quantas hedge-fund, even though the assets were invested in the hot biotech, telecom and computer sectors. His top managers and traders have resigned, and Soros has announced he will reorganize and rename the fund, including adopting a different investment strategy.
If the majority of stocks are down, and even the two greatest money-managers in history suffered huge losses by not being able to determine which would be up, one has to wonder what would have happened to Social Security assets if other distractions, like the impeachment process and debating how to spend the budget surplus, had not interfered with Congress' plan.
The recent stock market gyrations should have been a warning, but talk persists, spurred on by Wall Street, that Social Security assets should be placed in the stock market.
Meanwhile, even after the losses suffered by most stocks over the last 18 months, the Federal Reserve's model suggests the Dow and S&P 500 are still overvalued by 35%, while most independent analysts claim it's closer to 40%.
With Social Security funding already a problem (thanks to the government's loose ways with how the money is handled), the last thing needed is to have Congress forget why Social Security came into being in the first place, by placing the government-guaranteed safe portion of the population's retirement funding, as small as it is individually, in the self-serving hands of Wall Street.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of providing research to serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, and author of Riding the BearHow to Prosper in the Coming Bear Market, $12.95. The book introduces The Seasonal Timing System© which tripled the return of the Dow over the last 35 years through bull and bear markets, and did so with half of market risk. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
