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Social Security Privatization: There Is a Role for Stable Value

"Forethought we may have…but not foresight"

Napoleon

While none of us can predict the future with any degree of exactitude, we can do our best to prepare for it. We know that over $33 trillion in promised Social Security benefits is expected to be paid over the next 75 years to the baby boom generation. And, despite the stock market's poor performance, about half of all Americans still favor investing a portion of their Social Security savings in stock market or private accounts, according to a recent Washington Post-ABC News poll. We feel that private self-directed accounts represent a significant opportunity for individuals to enhance their retirement security.

For self-directed accounts to become reality, it will be critical to develop investment options that protect against the downside for participants. Stable Value has a proven record in protecting investors against the downside of the market. While the focus has been on equity investments, I believe there is a role for fixed-income investments and, specifically, Stable Value.

Stable Value investments should be a core investment option in any self-directed Social Security plan. Stable Value investments have delivered healthy investment returns with low levels of volatility. As investors typically prefer lower volatility (holding returns constant), Stable Value is clearly preferable to other more volatile fixed-income assets. Stable Value also produces higher earnings than other low volatility investment options like money market instruments. The combination of principal protection, low volatility, and steady, investment returns seems to best meet the needs of plan participants in the more conservative investment sector.

While the application for participants approaching retirement age is obvious, Stable Value should not be ignored as an investment option for younger participants. Market cycles between busts and recoveries for more volatile asset classes like equity and real estate have, on occasion, been prolonged. This may ultimately result in the need for workers to postpone retirement to a later date than anticipated or to invest more aggressively to try to offset negative portfolio adjustments. Stable Value reduces both of these risks making Stable Value a powerful and effective diversification vehicle for investors regardless of age.

To ensure that all Americans have the access to Stable Value's benefits in Social Security private accounts, Stable Value providers must actively participate in this debate. Through participation, Stable Value providers can educate the public and policymakers on how effective Stable Value is and the role it can play in private accounts. Without such participation, the terms of the new Social Security system will be dictated rather than influenced by Stable Value. While only a very small percentage of the Social Security obligations initially would be funded in self-directed accounts, it is estimated that $80 billion per year will flow into self-directed Social Security accounts, quickly creating a meaningful pool of assets.

The Stable Value sector can further increase its role in private Social Security accounts if it shows a willingness to add new asset classes to Stable Value's traditional diversified fixed-income portfolio. The winners will be those firms that are prepared to move quickly when the system is reformed, and those that can demonstrate the flexibility to meet new and possibly unanticipated market demands.

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