10 Responses to “How to Save Social Security, take II!”

1. dlw on July 8th, 2006 2:59 am

   I may be getting more ambitious in my ideas for Stock Market reform. I think there’s something to the notion that the log-return is a better way to judge stocks than the return, where log-return=ln(1+return). It might be a good idea to mandate papers or funds to share with people statistics like what US Mutual would be using to determine its stock-holdings, instead of the current statistics that they list.

   I also think it matters that many current mutual funds perform not that well relative to the overall average. If the NYSE were less volatile due to the presence and the investment strategies of US Mutual, then I’m not sure I’d see any objective point for us allowing for private mutual funds to operate. The US Gov’t could set up a publically-run duopoly in the mutual fund business. The second fund would use the same basic approach as the one described above but with an index of value that would weight the predicted median log-return twice as much as its predicted median standard deviation. People would then be allowed to either pick their stock investments, individually or as part of a group, or buy into either fund or a combination of the two. We could even allow risk-loving investors to combine buying long in the less conservative US Mutual fund with selling short in the more conservative one or for more risk-averse investors to do the opposite.

   As alluded to above, mathematically-speaking, you really only need two mutual funds with different investment strategies to accomodate a wide range of investment risk-preferences. I think it would be to the advantage of the individual investor if there were only two mutual funds, and both used economies of scale and a simple algorithm to pick stocks relatively conservatively in a manner that helped to reduce the overall volatility of the NYSE.

   This would also promote better stewardship of our economy by attracting capital away from hedges and helping the more stable smaller and medium-sized firms to raise their needed capital. It’s common knowledge that such firms are often better at job-production in the first place and would be worthy of our support.

   dlw

2. The Anti-Manichaeist » Blog Archive » How to Save Social Security! on July 8th, 2006 1:20 pm

   [...] 4th of July, 2006How to Save Social Security! Posted by dlw in Uncategorized at 8:48 pm | Permanent Link Here is the new and improved version of the idea. The goal would be not just to“save” Social Security, but to allow it to guarantee people a 6% guaranteed return on their Social Security savings and to help reduce the volatility of the New York Stock Exchange.  I’ve also now set out here a simplified version of the idea that includes fewer details of the system, to keep it simple and compelling…  The idea is that, instead of privatizing Social Security, we could have the US Government start up its own Mutual Fund, using part of the Social Security Trust Fund. The Mutual Fund, US Mutual, would take advantage of its economies of scale and target a 6% control of the predicted Total Market Valuation of the NYSE. It would circumvent its potential for corruption by basing its investments on a conservative investing strategy implicit in a simple algorithm that would only require 27 weeks of publicly available NYSE data. Almost everything would be based on simple but reliable statistics that could be verified by others. The goal would be to save Social Security, improve on the return to people’s savings therein, and to increase the stability of the NYSE and thereby attract more long term stable investment in it.     [...]

3. Ted Gossard on July 10th, 2006 12:19 am

   dlw, Why don’t you run for a political office on a state level? Or some level by which you could get your ideas to become a part of the national discussion. Write a book.

   You do have some fine ideas. And I especially like this one. Our Social Security is going to pot. Why can’t something like this be done? Too risky!?What a laugh. Congress should be the last body in the world that complains about risk taking with reference to money!

4. keith johnson on July 11th, 2006 9:01 pm

   Hi dlw

   I have a question about the whole SS issue, but it will require a somewhat lengthy opening remark before I get to the question. Here’s what the question will be “so where does my thinking go wrong?”:-)

   Neither Social Security nor private pensions any support for any retiree and never have, not one dime. It’s the real economy that supports retirees, not any kind of financing arrangement–WHETHER IT BE PUBLIC OR PRIVATE IS IRRELEVANT. If the real economy will have a difficult time supporting future retirees, rearranging pension plans does nothing to stave off the problem. Pensions just represents a *promise* to future retirees that we will provide them with a certain level of benefits; whether or not we will be able to keep the promise is a function not of the structure of the pension but instead of the real economy. If the current system of pensions promises them less than a different system would, the money they gain from the different system will have to come from somewhere. If the current system promises them more than our economy will be able to provide, we can fix the “system” by reducing our promise to them, but that would make them worse off, not better.

   So, whats wrong with my reasoning?

   your friend
   Keith

5. dlw on July 11th, 2006 10:47 pm

   ooh boy, whether it’s private or public affects the investment strategy that affects the likely return and which can potentially affect the performance of the stock market.

   You see the stock market is tied to the real economy, but not terribly tightly so… There’s plenty of room for folks to try to time the market and make money off of its vituperations.

   As such, strategy matters(how one picks stocks), economies of scale(how much is being invested, as the selection of some stocks to go up can become a self-fulfilling prophecy.), and diversification(when you have many different stocks, the variance of your return goes down.), and low overhead(you don’t have to pay “experts” to pick stocks if a relatively simple algorithm is being used.), and safeguards against corruption(the algorithm will prevent managers from picking stocks for the wrong reasons) matter.

   dlw

6. keith johnson on July 12th, 2006 12:20 am

   Hi dlw

   Sorry for my unparralled ignorance. I am a math guy so I tend to look for the bottom line, which still seems to me to be this: future retirees will be consuming goods and services produced by future workers. I can understand how a different retirement system could result in future retirees having a claim to a larger amount of our national product. But the extra income they receive has to come from somewhere. Whose loss pays for their gain?

   your friend
   Keith

7. dlw on July 12th, 2006 1:17 am

   That is more simple. The extra income will come from other stock investors at the NYSE.

   When US Mutual buys long on the most stable performing stocks in our country and their stock values rises, it will get the equity gain rather than other investors who sold their stock. And, when the value of the most unstable underperforming stocks in the NYSE goes down, as is likely given the extent that US Mutual will be selling short their stock, US Mutual will make money at the expense of those who bought the stock.

   So that’s the bottom line. The price for saving SS gets paid by stock investors, not the US public…
   dlw

8. The Anti-Manichaeist » Blog Archive » A simple thought experiment on US Mutual on July 13th, 2006 7:12 pm

   [...] I was doing some research on the net about my idea to save Social Security and reduce the NYSE’s volatility.  I came across the following article that had some helpful statistics on how the S&P500’s annual return has recently been 10.60% with a 4.20% monthly standard deviation.  It also mentions that a group of preferred stocks has recently had an 8.17% annual return and a 1.11% monthly standard deviation.  I used a simple linear extrapolation to find a 7.30% return for a certainty equivalent.  I bring this example up because the group of preferred stocks seem like the sorts of stocks that US Mutual would buy long on.  [...]

9. The Anti-Manichaeist » Blog Archive » Tinkering with the Idea some. on July 17th, 2006 5:32 pm

   [...] I’ve had a small change in my idea on how we could both save Social Security and reduce the volatility of the NYSE with a public mutual fund, US Mutual.  As described earlier, US Mutual’s holdings would be determined using 28 weeks of publicly available data and some predictions made using simple median statistics of the stocks’ weekly log-returns and their standard deviations.  The change is that I’ve thought a little bit more about the predictions that would be used to determine the fund’s holdings. [...]

10. The Anti-Manichaeist » Blog Archive » We Need to Debate More About Transforming the Social Security Trust Fund! on July 21st, 2006 3:10 pm

    [...] I’ve been blogging here(this is cross-posted from at TPMCafe) a bit about my idea to have the US Gov’t start up a public mutual fund, US Mutual. This idea is not completely new with me. Here is an article that describes how a similar idea was considered during the Clinton Admin. The bottom line is that The projected annual rate of return on U.S Treasury securities held in the Social Security trust funds is 2.7 percent, after inflation. In contrast, stocks generated an annual return of about 7 percent above the inflation rate from 1900 to 1995. If past serves as prologue and stocks continue to significantly outperform Treasuries in the future, diversification would bolster the trust funds. [...]

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