eor | (no subject)

There is a lot of talk right now about Social Security right now. It's broke because the retirement of the baby boomers will cause benefits paid out to outstrip the funds being contributed by the younger workers. It's going to happen unless income is raised (payroll taxes), benefits are cut, or the system is otherwise changed. The Prez has proposed privatizing social security, get the government out of the retirement business and let Americans suffer their own poor investing practices, corporate corruption, and lack of savings ethic. Maybe that would be a good payback to Americans being as foolish, unconcerned, and lemming like as they seem to be. The cost of the proposal would be somewhere around $2 trillion, which would have to be paid out now in, trading a debt to individual Americans in the form of Social Security funds for other government borrowings. I was thinking about the ramifications of this idea today.

The obvious part of the equation is the part which started the whole thing. Suddenly Americans will have an additional $2 trillion dollars to invest and they'll almost certainly throw it at the stock market via mutual funds. The stock market will soar. Those in power stay in power. Those who are rich become richer.

The second most obvious part come when the baby boomers begin to retire. Remember, the original problem was a net outflow of cash. What happens to a stock market when people start selling at a rate greater than they're buying? Add to that the panic when retirees figure out that their life savings are disappearing and everyone tries to shuffle their funds off into bonds and CDs as quick as they can call their broker. Late boomers will get screwed big time because they'll be behind the curve and selling in a falling market. There will be a lot of people looking to become greeters at Walmart.

But what about the less obvious side of the equation? That debt was actually being used for something previously. All that money is currently invested in US government T-bills. Bonds are funny things, their price never changes but when demand goes down their interest rate goes up (to draw more money into the market away from other investments). Take away that $2 trillion in captive buyers, then add in a hyper inflated stock market attracting people away from bonds and you'll have T-bill interest rates rising to compete. That has all kinds of hard to predict consequences. Corporate bond interest rates will go up because they compete with T-bills for investor money. With our record deficits, a hike in interest rates will mean a much higher debt service burden overall. Taxes will go up or services will go down. The government won't have that slush fund of Social Security to draw on anymore which means they'll have to find other funds to play with when they want to do things like finance wars. Oh, the housing market might also be pretty severely impacted in the process, between interest rates and people trying to create liquid assets if the stock market tanks after they retire.

I don't know how you could predict just what will happen in detail. I do think it might cause some mighty big swings in the financial markets.

As I said to one of the guys at work who is a baby boomer: "Don't worry when it's all said and done I'll buy everything at bargain basement prices. Once I manage to pull the cash out from under my mattress." I'll be looking at moving into a house when all the boomers are looking at getting out of theirs. I'll be looking at a retirement in a warm place after all the boomers are no longer competing for oxygen, plasma TVs, or larger SUVs.