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compassion, it makes little sense to keep them

These plans do not require their participants to

Low-income

from having the same opportunity that higher-

be intelligent or knowledgeable investors. For

workers

income workers have to build wealth for their

decades, workers of all income groups in

earned greater

own retirement through savings and investing,

defined benefit plans have entrusted their pen-

and to be able to leave assets to their children.

sion benefits to sophisticated investors, who for

retirement

the most part have done very well in fulfilling

benefits from

their fiduciary responsibilities. In defined contri-

Objection #2: Financial security

bonds and

bution plans where individuals have more of the

in old age should not depend

investment responsibility, evidence suggests

stocks than

upon the participant being a

that they invest intelligently if given proper

they did from

investment guidance.

knowledgeable investor.

Social

Under the type of privatized system likely to

Critics of privatization argue that individual

pass Congress, each individual would be free to

Security. On

investment knowledge is a necessary condition

hire the investment management firm of his

average, the

for adopting a market-based system. They then

choice. Congress will likely insist that such

suggest that it is obviously unreasonable to sub-

stock market

firms be licensed and regulated by the govern-

mit that all workers have this knowledge. Their

ment, much as they are today. As a condition of

provided more

points taken together--the requirement for, yet

authorization, however, assets would be man-

than a 100

absence of, investment knowledge--is an argu-

aged based upon prudent investment guidelines

ment against a market-based system. This posi-

percent

determined by a Board of Trustees--investment

tion is expressed in the Report of the 1994-1996

professionals who have the knowledge and

increase in

Advisory Council on Social Security:

experience in dealing with these issues.

low-income

Guidelines may include investing in only

Investors need sophisticated knowledge to

workers'

approved asset classes, imposing maximum per-

invest successfully, a sophistication millions of

centage limits on each asset class, requiring nec-

participants in Social Security lack. In order to

standard of

do reasonably well over time--nothing is

essary liquidity, and changing portfolio compo-

living during

guaranteed--investors must be able to assess

sition as retirement age nears. The objective of

the value of the companies whose stocks and

retirement.

these constraints is not to limit choice, but rather

bonds are offered to them. But many, perhaps

to reasonably assure the building of wealth for

100 million participants in Social Security,

retirement without incurring unnecessary risk.

lack requisite knowledge, such as the market

In structuring portfolios, investment man-

served by individual companies, ways of judg-

agers have many assets from which to choose.

ing the competence of management, relevant

At year-end 1995, the global stock markets

changes in technology and whether an individ-

were valued at $17.7 trillion.14 Figure 1 illus-

ual company is able to keep current, the com-

petitive situation, both local and sometimes

international, the company's unfunded prom-

ises to pay deferred compensation to highly

paid employees, and many other factors.

Figure 1

Some relevant issues will be included in the

World Equity Capitalization

accounting statement in the company's annual

report, but most retirees do not know how to

Emerging Markets

Europe, Australia,

interpret this information even if provided to

12%

Far East, and Canada

them by purveyors of securities. Without ade-

United States

50%

quate knowledge, privatization will leave

38%

many who are required to substitute invest-

ments for assured Social Security benefits

without the ability to protect themselves

against potential disaster.13

Contrary to the above assertions, it is not nec-

essary that workers have such knowledge. A

properly designed market-based system would

build on the structures already developed for

defined-benefit and defined-contribution plans

prevalent throughout the United States today.

Source: Emerging Markets Fact Book, 1996. International Finance Corporation

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