A Classic Finance Paper for the Soc. Sec. Privatization Crowd

When I read opinion pieces such as this one:

HE LOST US BEFORE HE’D FINISHED A SENTENCE: Buying Into Failure (PAUL KRUGMAN, December 17, 2004, NY Times)

“As the Bush administration tries to persuade America to convert Social Security into a giant 401(k)…”

Why wouldn’t anyone who has a 401k–which is well over 40 million of us–want SS to be similar? Posted by Orrin Judd

I want to send the writer a copy of Harry Markowitz, “Portfolio Selection”, Journal of Finance (1952). Maybe Mr. Judd does not get the simple point – stocks pay a higher EXPECTED return only because of the additional risk holding stocks imposes upon the individual.

Now rational investors know this – so Markowitz might have argued that rational investors have already allocated their mix of Social Security and 401k retirement funds to achieve the optimal position of expected return v. risk. So if we privatize, rational investors will put EVERY penny of the Social Security funds into the same government bonds the Trust Fund currently does. Hence not one bit of extra return.

Oh but wait – even President Bush does not understand the basic principles of Modern Portfolio Theory. So why should Mr Judd. Wonder if Mr. Judd understands how to spell challenge?