Are Most People Smart Enough to Invest Their Own Money?

I am a strong advocate of voluntary personal retirement accounts. I believe that in the long run such accounts will (1) solve the funding problem, and (2) provide a greater benefit than is available under the current system. This has been demonstrated in numerous studies. I refer you to Social Security: The Inherent Contradiction by Peter J. Ferrara or the updated version, New Deal for Social Security by Ferrara and Michael Tanner. Even at relatively low rates of return, workers in all income categories are projected to have greater retirement benefits than they will have under the current system. Another interesting paper is "Social Security versus Private Retirement Accounts: A Historical Analysis" published in the Federal Bank of St. Louis Review in March/April 2005.

Even if they accept that personal retirement accounts are theoretically able to pay greater benefits many people worry that individuals would make poor investment choices either because they lack investment education and experience or because they would make risky choices. This risk could be managed by limiting the investment options to a small number of conservatively-managed mutual funds similar to those offered by the Federal Employees Thrift Plan.

In future postings, I will address the issues of spousal benefits in case of the death of the earner and disability concerns.