Privatization: Risk & Return from the National Review

Cesar Conda’s guest oped makes a point that I can almost agree with:

Personal-Account Myths: They’re not the speculative vehicles Democrats want you to think they are… Like the TSP, personal retirement accounts would be invested in a conservative mix of broadly diversified bond and stock funds.

Let’s be clear – a shift from a defined benefits program to a defined contributions program involves aspects of risk beyond the portfolio risk that Mr. Conda discusses. But to be fair, my post focused on portfolio risk.

Mr. Conda will be happy to note that not only did I agree with the premise that individuals would not invest in highly speculative portfolios, but that Robert Barro and Edward Prescott agree with this premise. But they would also note that the higher expected returns promised by the free lunch advocates of privatization come only as the reward for taking extra risk. If one chooses to allocate one’s portfolio so as to not take extra risk, which is the premise that Dr. Barro and I have been arguing, there is no extra expected return. If Mr. Conda agrees with us – great. But then why are his colleagues arguing there is some free lunch?