On NPR today, a guest, who was discussing the possible privatization of Social Security said that if we completely converted from a pay-as-you-go system to an investment-based system, the stock market would not be able to absorb all of the money needed to fund the retirements of all the workers.
Huh?
Does that mean that if tomorrow all workers became financially prudent and began putting 13% (or whatever % needed to fully finance their own retirement) into index funds they wouldn’t be able buy shares?
If the stock market was “full” and they then tried to put money into savings accounts, would the banks start turning away money because THEY, in turn, would have nowhere to invest it??? It seems ridiculous that a bank would ever NOT want more money. Cost of capital goes down. Perhaps some riskier investment. But is there a point when the markets are just “full?” Wouldn’t there always be some new idea to invest in?
Assumption: I think the guest was assuming only investment in the US market, so of course, if somehow the US market became “full” there would be international investment, but the theoretical question would remain—(just imagine all workers in the world saving at 13%).
The stock market can’t become “full” per se, but some bad things could potentially happen.
If everyone dumped a huge amount of money into the stock market all at once, demand for shares would increase, driving up share prices very quickly. Eventually, after the buying frenzy slows down, people would realize that these shares were extremely overvalued, and start selling. Stock market crashes and poof all our social security money is gone. Now in order for that to happen you’d have to be talking about a thoroughly ridiculous amount of money thrown at the market all at once, which is not likely to happen under a privitization scheme. Those schemes will likely be funds which invest in other things besides just the stock market, including bonds, real estate, commodities, etc.
Banks aren’t going to start refusing deposits for any reason. Remember, their primary investment is debt. (i.e. making loans.) A stock market crash might dry up the loan market (because people would not be in a house/car buying mood) but the banks would still need deposits to cover their other financial obligations anyway.
Given that the number of things you can buy in any given market is limited, could everything for sale in the US stock and commodity markets get bought? That is, does it even make sense to imagine someone or some group being able to purchase everything?
I know it will never happen and it would be the End of the World if it did, but does it even make sense to include it in the universe of discourse?
Don’t stocks with a higher price/earnings ratio tend to be historically more volatile than lower p/e stocks? You wouldn’t need to swamp the market with buys to see such an effect.
Just to keep this in perspective, the market capitalization of American companies traded on a major stock exchange is $33.6 trillion. Vast amounts of additional capital are tied up in corporate and government bonds, home mortgages, and overseas corporations.
Social Security only collects about $600 billion per year in taxes.
Furthermore, if Social Security stopped collecting those taxes, the government deficit would increase (in the short run) by $600 billion per year. (In the long run, this would be offset because the government would stop paying benefits to people who didn’t pay taxes; but current taxes fund current beneficiaries whose payments aren’t about to be cut.) The government would have to borrow the additional money, creating a demand for capital which would exactly offset the additional supply.
Of course. If you doubt this, ask a venture capitalist how many new business plans he or she rejected during the past year. Or ask a financial analyst for a large corporation how many business cases get rejected by corporate management (many) for every one that gets approved. Trust me, the demand for capital is utterly insatiable.
Freddy the Pig “the demand for capital is utterly insatiable.”
That’s a good question. Is capital the limiting factor in the economy? or a limiting factor? If it isn’t, then the stock market will act as a Ponzi scheme, where a money influx buys shares which rise in price due to the influx, but when people retire and draw down then the influx becomes an outflow* and the prices of shares go down (at least relatively, and depending on the ratio of in to out–see same footnote*).
In other words, a shortage of labor, which we seem to anticipate when the ratio of retired to employed becomes 1:2, could be a limiting factor. People retire, cash in a % of their investments, and start bidding up the salaries of doctors, taxidrivers, landscape services, home repair, waitresses, caregivers, farmers, and so on.
During the dot-com boom, a lot of venture capital went to ventures that turned into black holes for money.
*if you go by the numbers that are being used for SSec predictions, for the ratio between retired and employed.
This risk is certainly present. Some commentators believe that the 1982-1999 runup in stock prices, and the ongoing runup in housing prices, have been driven primarily by Baby Boom saving. Even without any change to Social Security, these commentators fear that asset prices will decline or even collapse when the BB generation retires.
I personally think that these fears are overblown. But they can’t be dismissed out of hand.
With respect to Social Security, the question is whether this generational cycle of asset buildup and drawdown would be exaggerated by the additional private saving that would be required. SS is currently collecting about $600 billion in payroll taxes each year and disbursing $550 billion in benefits. The annual surplus counting taxes alone (but not interest on the trust fund) is about $50 billion. If SS were fully funded, the surplus would be greater. If SS had never existed, this additional net amount would presumably be added to our capital stock each and every year as long as the BB generation keeps working.
Would this finance productive investment, or just inflate an asset bubble? Would it even be significant in relation to our $30-trillion-plus asset base? I don’t know; this is better left for GD.
But a blanket statement (as in the OP) that the stock market could not absorb this additional investment, or that we would be so sated with capital that banks would turn away deposits, can’t be supported by the numbers.