Proposed measures for reforming the American social security system call for allowing workers to invest a portion of their payroll FICA contributions in individually owned and directed personal retirement accounts.

This would amount to the partial securitization of social security taxes and could channel a significant volume of new funds into the U.S. securities markets. However, the details of these proposals are unclear, and we do not know the volume of funds that might be involved, the restrictions on investment, or the timing of the flows.

If workers are allowed the same freedom of investment as they now have in IRAs and 401(k) plans, and if the Common Stock Legend continues to hold sway, the flow of new money into equities could be the salvation of Baby Boomers who will be forced to sell stock funds within the next decade as they retire.

However, if the younger generation perceives equities as over-valued or if rules direct these new savings to the bond market, and if the trade deficit continues to grow, resulting in a continuation of the long-term declining trend in bond yields, this would be bad news for Baby Boomers who would be forced to sell equities and scrabble after falling interest rates for retirement income.

Although the securitization of social security seems likely to be good news for Wall Street, the question remains whether bond or stock salesmen and traders will be the main beneficiaries.

Watching the unfolding of the details on securitization of social security should be a priority for capital flow analysts during the second Bush term.

This entry was posted on Wednesday, January 5th, 2005 at 9:35 pm and is filed under Individual Investors. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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