Market Impact of Personal Social Security Accounts
re: Fears of pumped-up profits are overinflated (USA Today Op/Ed 4/6/05)
http://www.usatoday.com/news/opinion/editorials/2005-04-06-our-view_x.htm
To the Editors:
In addition to the misconception about personal accounts being a major windfall for Wall Street, the public also worries needlessly about “market distortions” caused by the influx of capital into the stock and bond markets.
With a current payroll tax rate of 12.4%, the total amount of payroll tax collected for OASDI (the retirement and disability portions of Social Security) in 2004 was $657 billion. If 4% of workers’ incomes (less than 1/3 of the current tax) had been allowed into personal accounts, there would have been $212 billion of cash available to the markets. If you assume 2/3 going into stocks and 1/3 going into bonds, that is $141 billion and $71 billion, respectively.
The average dollar value of stocks traded on the NYSE in 2004 was $46 billion per day with over $34 billion dollars worth of shares traded daily on the NASDAQ. An entire year’s worth of contributions is less than 2 days of aggregate volume (and less than one day if you include foreign markets) and would not cause any distortion when spread out over the year, as payroll tax deductions are.
The effect on the bond market from personal accounts is even less relevant. The average daily dollar value of US treasury securities trading in 2004 was just under $500 billion. Then there are the corporate and foreign debt markets. So the part of personal accounts investing in “fixed income” for a year could be swallowed in about half an hour of trading without a hiccup.
We should also remember that the stock market is not a zero-sum game. Wealth can be created, and availability of investment capital is the main ingredient. I might wish that a “distortion” would occur because that would mean that we’re all richer and might get mortgages at lower rates.
Any argument that Social Security will distort markets is a red herring. Our markets are more than large and liquid enough to handle much greater influxes of capital than are currently being proposed. I hope we are one day fortunate enough to give the markets a chance to demonstrate.
| Print article | This entry was posted by Rossputin on 04/08/05 at 09:28:24 am . Follow any responses to this post through RSS 2.0. |
Yours truly
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04/10/05 @ 11:21:46 pm
Ross,
Remember that the argument about that money distorting the market is assuming one thing: the plan set up by the government will be restrictive, and force that huge amount of money to move monolithically.
I've said many times that if they set the plan up right, it could be a great thing. But I think you're fooling yourself if you think they're actually going to give you real control over your money. And the extent to which they regulate the market, they could cause significant distortion.
04/11/05 @ 10:02:31 am
Brad,
I agree with your general premise that personal accounts might not be able to buy every stock that trades on nasdaq or nyse or every bond.
With the bonds, the restriction is irrelevant because any bonds likely not to be permitted will be very small in proportion to the size of the market. I expect that bonds people are allowed to invest in would still take a year's contributions in less than an hour.
As for stocks, the effect could be more noticeable. However, the vast majority of trading volume on both exchanges are from the more widely-followed stocks including those in several major indices. I don't think any restrictions would take more than 1/4 of potential stock investments away from personal accounts. If it were less than 3 days of volume instead of two days, or 1.5 days including foreign stocks instead of 1 day, I still submit that the market impact is an irrelevant argument against reform.
Thanks for writing
Ross
04/11/05 @ 10:39:52 am
I largely came to the same conclusion that the stock market would not see a sustained upward bump due to the existence of PRAs through other logic, so it's nice to see that someone has done some math to show that the potential impact of PRA directed investing will likely be minimal just based on the numbers. Good insight!
Reference:
http://politicalcalculations.blogspot.com/2005/02/social-security-reform-and-stock.html
06/10/05 @ 01:46:44 pm
I've been reading a lot about this issue in blogs and you're the first person to actually put some math out there for the world to see. I read one author that stated the the problem will come when the baby boomers all go to sell their stocks at the same time. I've been trying to find out more about this issue, but haven't seen any substantial info as of yet. If anyone can provide more info with numbers and facts of how the government will pay for this program without putting our country into incredible debt please let me know. I'm still trying to make up my mind on this issue. Thanks
06/11/05 @ 07:36:56 am
Hi KP,
Please take a look at this excellent article by Don Luskin about the myth of transition costs.
Best,
Ross
http://www.capmag.com/article.asp?id=993