Keep Wall Street Out of the Retirement Business

[EV_Ares]

Should we trust the folks who brought us Lehman and AIG with a privatized Social Security system? Should we trust them with our 401(k)s?

Remember the Bush Administration's push to partially privatize Social Security? The privatization advocates warned that insolvency loomed unless dramatic changes were made to the system. Social Security was also labeled a terrible investment. The Bush team's argument: Let people invest a portion of their payroll tax money with the financial wizards of Wall Street in an account reminiscent of a 401(k). Workers would get a higher rate of return on their Social Security money, and the economy would benefit from a higher rate of savings.

"We heard the fear that Social Security will go bankrupt and the solution is privatize it," says Zvi Bodie, a finance professor at Boston University. "Yeah, right! It was a self-serving proposal from industry."

Imagine Bear Stearns, Lehman Brothers (LEH), American International Group (AIG), and other titans of finance managing Social Security? The late economist Robert Eisner told me during an interview in the early 1990s that "Social Security was not meant to be a get-rich scheme or a competitor to go-go funds." He was right.

Wall Street doesn't do well by the average worker. The standard advice that individuals fare best when they turn over their money to professional money managers is wrong. It's a bromide guaranteed to lose individuals money, with much scholarly evidence that actively managed mutual funds systematically underperform passively constructed index funds.

Plus, workers are paying a lot in fees for that underperformance. As Warren Buffett put it in Berkshire Hathaway's (BRKA) 2006 annual report, "Meanwhile, Wall Street's Pied Pipers of Performance will have encouraged the futile hopes of the family…will be assured that they all can achieve above-average investment performance—but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon."

In 1940, Fred Schwed Jr. famously captured the essence of Swensen's perspective with one of the most memorable Wall Street book titles ever: Where Are the Customers' Yachts? It's worth repeating the allegory that starts off his book:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor.

He said, "Look, those are the bankers' and brokers' yachts."

"Where are the customer yachts?" asked the naive visitor.

entire Business Week article @ the link: http://www.businessweek.com/investor/content/sep2008/pi20080918_216336_page_2.htm

[avaistheone1]

1. Hopefully everyone with half a brain has learned that lesson as a

result of all these Wall Street failures.

[4lbs]

2. I think the idea of privatization of Social Security won't be pushed by the GOP for a long time.

After all, after John McCain called Wall Street like a "runaway casino", who the heck wants to allow millions of ignorant people the ability to throw their retirment funds into this "casino" ?