As I said on another board, I hate to sound like a broken record, but private accounts are great as long as they are on top of Social Security. People have the chance to do well, or even very well, and even if they don't, they still have the basic level of income for old age. If the accounts do poorly, people will have lost some money, but they won't be completely screwed.

And yes, we already have private accounts, but we should expand access to them. As Brad said, it's a scandal that the poor don't have as much access to equities.

Given the constraints you have to put on the "accounts," Brad, I've never been able to figure out why they're worth the bother.

And I don't get the idea of private accounts "on top" of social security, either, except as a further attempt to shelter the income of the well-to-do from taxes and starve the government of revenue.

I agree David. Let's put all of our eggs in one basket is hardly diversification, even if it is a market index, that by its size would become worthless. Why bother?

But Brad, digging up what little I remember from Finance, once you've decided to use the stock market for long term security programs, why not just let the Feds or State determine an acceptable risk level, and let them buy the the market index and lend with Federal or State bonds?

Since the gov't can lend "risk free assets", and since they can likely share AND enjoy the dangers and benefits of a higher amount of risk, isn't that the place for investing in the market since it is far easier for them to achieve the optimal portfolio than for us individuals?

David,

Can't we just regulate the accounts to some sort of index for contributions to make sure that the wealthy don't shelter too much money? For instance, someone who makes $500,000 a year would not be able to have any more than, say, 5-8% of his income in such an account?

I believe Brad is arguing that, even on a risk-adjusted basis, there is probably money to be made, on balance, from investing in equities.

While I don't necessarily disagree, I'm still not sanguine about the mechanism, given that the "insurance company" model requires either a variable payout (floored, perhaps, but with an equity component based on market performance) or it will create artificial imbalances of timing.

And, as I've noted, the poor "cannot" invest in equities because the cost of capital (read: credit risk) is greater than the expected return on equity. If you want to be "fair," someone has to pay for it. Part of that "payment" will be in the excess funds being invested into the market, which will lower the return for the market as a whole (more money presumably not chasing an equally greater value produces a lower return); another part will come from how the payment mechanism for retirees is managed. (The question I raised above: if I retire in April of 2027 and you retire in July of 2027 but the market drops 10% in June of 2027, what is the effect on your retirement fund--or mine?)

Brad's point about the poor lacking ready access to equity markets makes sense to the point that the poor don't have sufficient capital to attract the attention of financial institutions. If you cash your check at a pawn shop, you aren't likely to have a brokerage account.

But a far greater barrier to the poor investing in equities not structural or institutional. The poor don't save because all their income goes to current consumption, or worse, to paying off consumption in earlier periods. If we want to give them the benefits of equity ivnestment, it will very likely have to be with somebody else's money. We can tax those who are better off to provide a risky form of savings that the poor can't tap till retirement, or we can tax somebody who is better off to provide direct cash benefits. I'm not sure that we need to jump through all the hoops necessary to make the poor the nominal holders of equity, when it will have to be bought with somebody elses tax money and the poor won't have access to the cash till retirement. Why not just let the original holder of the cash invest it, or spend it or whatever they want to do, on the understanding that they will be taxed on any or all of those activities to provide a decent retirement for the less fortunate.

"If you want to be "fair," someone has to pay for it"

"If we want to give them the benefits of equity ivnestment, it will very likely have to be with somebody else's money."

So? Outside of a few reasonable libertarians who might worry about incentive issues, the only people who will be horribly bothered by this are the Grover Norquist types.

To give just one example, Pete Peterson, former Commerce Secretary under President Nixon, advocated partial privatization in his book "Running on Empty." He admits that such a system would result in a loss of some progressivity, and to make up for that, he proposes giving subsidies to low income people.