Private Social Security Accounts

Okay, if I hear someone throw out the idea of private SS accounts one more time without at least putting some thought into the resulting issues ... I'll scream.

I am not going to talk about whether we should do this or not -- I just want to point out four potential issues.

1) What funds or companies get to do the investing? What kind of vetting process occurs? What types of funds are included or excluded? Can people treat these as brokerage accounts or would they have 3 to 5 options ranging from high yield bond to agreesive stock? (I don't think there would be a cash or government bond option, since that kind of defeats the purpose of allowing more agressive investing!)

2) What kind of provisions for bailouts would we need to have in place? I think people, without some kind of penalty in place, would simply opt for the most aggressive option, and if it lost money, would expect the government to replace what was "lost".

3) This is the worst for me: if we have a sudden influx of $13 to $65 BILLION dollars into the market*, that would simply causes company share prices to rise without any intrinsic value change. With more buyers than sellers, prices rise, and these funds simply have to add the contributions received into whatever style companies they invest in. Thus, a fund mimicing the S&P 500 would blindly buy more shares of those 500 companies. Notice this: those companies have not performed better and are attracting more capital as a result -- there would simply be too much money floating around.

4. Then consider what happens when the stock market hiccups. People transfer money from the aggressive options into the "safer" ones. There is so much being moved that all those phantom gains get lost, and cause oh-too-real pain for "real" shareholders.

I am not saying privatizing accounts in some manner wouldn't work -- I just want to see real dialogue on the process.

Regards
Trond

* "Income including interest to the combined Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds amounted to $785 billion ($656 billion in net contributions, $19 billion from taxation of benefits and $110 billion in interest) in 2007. "
http://www.ssa.gov/pressoffice/pr/trustee08-pr.htm
I assume here that anywhere from 2 to 10% of people's individual contributions get added to these accounts.