Friday, January 21, 2005

Kudlow's Blog

Just wanted to remind everyone that Larry Kudlow of CNBC has a very incisive and sharp blog up and running. Recently, I found myself in great accord with Larry's take on the ensuing Social Security debacle:
I call it spending a nickel to make a dollar. A good trade. On K&C last night, investment manager Gene Henssler reported his simple calculation. In the present Social Security system, someone making $65,000 a year with 1% investment growth would have $476,000 when they retired. But with 20% in a stock fund, the return would be over $800,000. Don Luskin has made a similar case on our show.

For me, the issues are simple and clear. First, Bush’s reform would create true retirement asset ownership. Beneficiaries could bequeath their money to their children. Spouses would be well taken care of if the breadwinner prematurely passes away. Young people would think differently and take more responsibility. Second, a prudent combination of stock and bond investing over 30 or more years will generate a much higher rate of return. Third, the reform plan will generate savings for private sector capital formation rather than funding government spending.

For these simple reasons, I believe it is essential that a sensible form of Bush’s idea becomes law. If that means cutting mythical benefits for longer retirement or price indexing, so be it. Those benefits aren’t real because we’d have to double the payroll tax to achieve them. And that will never happen. But ownership and market-based investment returns would be a revolutionary development.

Politicians must be willing to take some risks in order to achieve this revolutionary reform. Our economic welfare over the long-run will be greatly enhanced in the event. Either you believe in markets, or you believe in government. FDR and Maynard Keynes believed in government. But 70 years later sensible people around the world have come to believe in markets. Is it just this simple? I believe it is.

Personal saving accounts as part of social security reform and reconstruction. From 1926 to the present, stock market returns have averaged just over 10% yearly (pre-inflation, about 7% after-inflation). The worst return for a 25-year investor starting in 1929 was 6%, for a 35-year investor it was 8%. "
He also recommends periodic contributions called "dollar cost averaging." In this way long-term investors starting in 1929 got returns averaging 7% to 10% yearly as the low end of their historical experience.

However, the Bush Administration had better start communicating these long-run returns and the credibility of well-known academics who have researched them. Last week's Gallup Poll showed that while 71% of people believe the Social Security system is either in crisis or has a major problem, by a huge 55% to 40% margin folks think that investing some of their Social Security taxes in stocks or bonds is a bad idea.

With nearly 50% of the public already invested in stocks, the Gallup finding has to be bad news for the Bushies. My guess is that the White House and Treasury is spending too much time worrying out loud about so-called transition funding and benefit cuts, and not nearly enough time and energy on the superiority of market-driven benefits for future retirees. Nor have they spent enough time on the benefits of ownership for the spouse of a deceased breadwinner or the children or other family heirs.

Ownership and retirement returns can carry the day for Mr. Bush. At bottom, if folks understand the trade-off between another bankrupt government entitlement and a credible history of dependable market returns, they'll support the market.

About Us | In the News | Management | Contact Us | Archive | Premium Membership | Terms of Use | Privacy Policy | Careers | FAQ

All quotes are 15 minutes delayed. Copyright © 2006 by Catablast! Media Group LLC, part of the SeekingAlpha network. Web Design by Synexio Systems. All Rights Reserved.