Argument: Odds against individuals investing retirement accounts wisely

Issue Report: Privatizing social security


Greg Anrig and Bernard Wasow. “Twelve reasons why privatizing social security is a bad idea.” The Century Foundation: “Reason #5: The odds are against individuals investing successfully.”]: “Privatization advocates like to stress the appeal of ‘individual choice’ and ‘personal control,’ while assuming in their forecasts that everyone’s accounts will match the overall performance of the stock market. But studies by Yale economist Robert J. Shiller and others have demonstrated that individual investors are far more likely to do worse than the market generally, even excluding the cost of commissions and administrative expenses. Indeed, research by Princeton University economist Burton G. Malkiel found that even professional money managers over time significantly underperformed indexes of the entire market.

Moreover, a number of surveys show that most people lack the knowledge to make even basic decisions about investing. For example, a Securities and Exchange Commission report synthesizing surveys of investors found that only 14 percent knew the difference between a growth stock and an income stock, and just 38 percent understood that when interest rates rise, bond prices go down.11 Almost half of all investors believed incorrectly that diversification guarantees that their portfolios will not suffer if the market drops, and 40 percent thought that a mutual fund’s operating costs have no impact on the returns they receive.

While predictions vary significantly about how investment markets will perform in the decades ahead, it is safe to say that any growth in individual accounts under privatization will be significantly lower than what the overall markets achieve.”