December 15, 1996

Retirees Flummox Stock Market, Social Security Plan

Just when the public felt it was getting the hang of a proposal to invest part of Social Security taxes in stocks and bonds, the financial market took a nose dive.

Ostensible cause of the sudden decrease in security values was a rhetorical question in a speech by Alan Greenspan, chairman of the Federal Reserve Board:

"How do we know when irrational exuberance has unduly escalated asset values which then become subject to unexpected and prolonged contractions?"

Translation: the booming stock market is poised for a major correction.

This observation had been noised by canny investors, but Greenspan felt it necessary to expand the theme. He said there was no need to worry so long as "a collapsing financial-asset bubble" did not undermine the economy.

The Fed chairman probably is the second-most influential person in the world after the United States president. When Greenspan said "bubble" in the same breath with stock prices, many investors panicked. It's like shouting "Fire!" in a crowded theater.

A massive, world-wide sell off of common stocks erupted.

After a one-day feeding frenzy, investors resumed the roaring bull market. After all, economic fundamentals are stable even if not exhilarating. Nevertheless, the market netted down 250 points in seven trading days.

This yoyo frightens small investors who can not bear losses. They crawl under the bed when someone says "Boo!"

Herein lies the difficulty of linking Social Security to the capitalist engine. What if there is another Great Depression when life savings were wiped out overnight?

Okay, so there stock market controls that should prevent another total collapse. What if there is simply inflationary creep? Or, worse, acceleration in the on-going devaluation of paper money?

Chairman Greenspan takes pride that interest rates have been kept low. Yet, this is the root problem with the economy. There is a natural optimum for interest on savings and investment -- historically 6 percent.

Today, passbook bank accounts earn about 2 percent, three-month certificates of deposit about 4.7 percent.

The combination of inflation and devaluation skids along at about 20 percent. Unless your savings and investments earn this, you are losing ground.

To overcome this double whammy, retirees take their nest eggs out of lending institutions and try to keep up by risks in the stock market. This is the fuel that has driven stock market prices out of sight.

Social Security supposedly is everyone's safety net, but more and more the net is reserved for indigents.

First it taxed half the benefits of married retirees earning $32,000 or more from all sources -- interest on savings, part-time employment, pensions and Social Security.

Certain to be enacted this year is a reduction in the cost of living adjustment (COLA) to Social Security benefits.

This will be accomplished by lowering the "real costs" of items making up the Consumer Price Index (CPI) which also determine COLAS for labor contracts and government handouts.

Social Security trustees also are working out details of a "means test." Benefits would be denied entirely to folks who managed to save and invest enough to have a private retirement income of $50,000 a year.

Never mind how much they and their employers paid into the Social Security Trust Fund over their lifetimes. Or how little was paid in by approved recipients.

It makes sense to allow citizens paying into Social Security to designate one-fourth of their credits for investment in high-grade securities of their choice. These would consist of AA grade corporate bonds, or mutual funds composed of a "basket" of blue-chip stocks.

If this had been done 40 years ago, today's Social Security pension would be twice as large.

A big advantage of privatization is withdrawal of Social Security premiums from the clutches of government spending on non-retirement and disability programs.

Before such a far reaching change will be adopted, water must be wrung out of the stock market. Consider the "price-earnings ratio" (PE) of stocks. This describes the relation of stock price to the earnings it produces.

A decade ago, investors favored stocks having a PE of 10 times earning -- that is, the dividends available to stock holders would enable them to recoup their investment (without gain) in 10 years.

Today, the PE of good stocks go up to 30 or 40. Extra-good stocks show PEs of 100 or more. The Wall Street Journal does not list PEs of 100 or more in its composite stock index -- showing instead the symbol cc. If you enjoy chilblain, note the number of cc in the Journal's stock listings.

Obviously, these stocks will not return the initial investment in the lives of the buyers or his/her descendents, much less earn a profit. One buys such stocks "on the come" a gamble that some one even more optimistic will buy in and reward the seller.

This is hardly more than a chain letter. Sooner or later reality sets in, and the last buyers take a shellacking.

Partial privatization of Social Security is worth a look-see. Bonds take first call on a company's earnings. Mutual stock funds spread risk. Best of all, taxes shifted into the market produce jobs and improve pension return.

It's called capitalism -- a terrible system but the best in the world when given an opportunity to function.

PARTING SHOTS

Folks in San Francisco got all excited when they discovered a 3-foot alligator in a city park. Wonder how they would react to one of our 12-foot beauties? Franciscans fearful of being devoured shipped His Gatorship to a Louisiana bayou. They don't know that gators dislike human flesh -- and spit you out after tasting a chunk.

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Hillary Clinton says she wants a "formal role" in fixing the new welfare reform law. That's like putting Dracula in charge of the blood bank.

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No matter what happens, there is always someone who knew it would.

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Hawaii has legalized same-sex marriages. Fortunately, homosexuality is not hereditary.

By Lindsey Williams, columnist for Sun Coast Media Group newspapers