Personal Retirement Accounts

As I was reading along this afternoon, I came across this article which has done some studies on the benefits of switching over to PRAs in place of total dependancy on Social Security.

I like the idea of PRAs. I believe that giving people options is the right thing to do. Not everyone will take advantage of those options, and much to the chagrin of the socialist crowd, the outcome will not be equal, but such is life. Choice is better than no choice.

I just worry that with studies like these, there are probably some important factors that may lead to the actual results being very different from the theoretical results, giving the socialists anti-choice ammunition.

Using past returns to extrapolate potential future returns is, of course, no guarantee, but it is usually a pretty good indicator, assuming that the macro environment in the market stays close to the same. PRAs, however, would change the market environment. Currently the Social Security money is just sitting there, doing nothing. With PRAs, it would rapidly flood into the market (both the stock market and the bond market) and would distort prices. Dumping a few hundred billion or even a couple trillion dollars into the market would significantly push up the demand for securities in the short term, leading to higher prices and lower returns. This phenomenom would be followed very soon after by a drop in prices as all that demand dried up after the initial establishment of the PRA accounts. Ultimately, a few people would lose some money in the whole settling out process, which would lend a false credence to the anti-PRA crowd.

The long term gains in retirement funding would far outstrip the short term pain from the settling out gyrations. The hardest part is going to be making it through the short term.

We need the PRAs. We just also need to be sure that we know all the potential pitfalls involved before we get started.