Monday, January 31, 2005

MasterCard of Investments Part 2

On January 18th, I blogged the idea of using my MasterCard as a cash advance to invest in the stock market. I got no online comments, but my wife sure had words to say. They were mostly to the effect of, "You've got to be kidding me!" and "Do you know how much that would cost?"

I bet most of you probably felt the same. This is a ridiculous idea and certainly one that isn't very financially prudent. Now, if I knew of a great surefire investment, then maybe, but if I just invested it in an index fund, I'd be stupid.

The CATO Institute's proposal for privatizing social security is roughly the same thing. Borrow 2 trillion dollars over the first ten years (and keep borrowing for another 30 years for a total cost of over 10 trillion) by issuing bonds to domestic and foreign investors (read China, Japan and European nations) with the hope that putting money in the stock market (again something like index funds) would outperform the interest on those bonds. Look at your 401k over the last 5 years. How much growth have you made? Probably not the 7% that the CATO institute seems to figure we gain each year.

The fine print that isn't mentioned is that the government will cut benefits and assume these private accounts will make up the difference. So let's look at the reality... the government borrows 2 trillion over 10 years, hopes that the stock market goes up greater than the cost of borrowing such money, cuts your benefits and you retire on the rest.

I'm all for an ownership society, but this is a ridiculous option. I own my flat, but I also have insurance. Social Security is insurance against elderly poverty. If we want people to take a further ownership in society then relax 401k contribution limits or make it easier for people to get on the property ladder, but borrowing 2 trillion from China and cutting social security benefits is not the answer