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This year may long be remembered as the year Social Security ceased to be the “third rail of American politics.” Social Security reform has moved to the center of this year’s presidential race thanks to the popularity of Personal Retirement Accounts (PRAs). PRAs would permit taxpayers to divert a portion of their payroll tax into a private investment account.
One of the criticisms levied against PRAs is that they would drain money from the Social Security Trust fund. The mythical nature of the “trust fund” proves this argument to be fraudulent. Payroll taxes go directly to the general revenue, not to a “lock-box”; today’s taxes pay the benefits of today’s retirees. When the ratio of taxpayers to retirees diminishes, as it is certain to do in the near future, Americans will be faced with an unpalatable choice between increased taxes or reduced benefits.
Opponents of Social Security reform have also argued that allowing Americans to divert a portion of their payroll taxes to private investments in the form of PRAs would be akin to “throwing them to the wolves.” The implication is that the average American would be lost in a financial world dominated by the Wall Street investment elite. Thanks to the proliferation of Electronic Communications Networks (ECNs) and Internet-based brokerage houses, this argument is now anachronistic.
ECNs allow for unlimited access to market information and permit buyers and sellers to trade directly with each other. This has led to reduced commission costs (typically one-tenth of those charged by traditional brokers) and more diversity in investing options.
According to a Gallup survey released this March, 61 percent of American adults own shares of stock. In total, more than 76 million Americans now own stock directly or through mutual funds or retirement accounts. Americans are more investment-savvy than ever before. With better access to financial information and markets, the number and know-how of American investors should steadily increase.
Unfortunately, the Securities Exchange Commission (SEC) is now considering encumbering regulations on ECNs and Internet-based brokerage housing. Regulations aimed at eliminating “market fragmentation” and reducing the costs of “market data,” would cripple ECNs by robbing them of precisely what allows for their existence: trading directly between buyers and sellers.
The irony, or course, is that SEC regulations intended to benefit the consumer by guaranteeing the lowest price would actually turn back the clock ten years and re-institute the financial monopoly bemoaned by opponents of Social Security reform.
The SEC regulations would mandate that the first and lowest offer would always be matched with the lowest selling price, regardless of market or method of transaction. Not only would this prevent self-contained trading because external offers would have to be accepted, it is an impossibility because the difference in processing time would prevent markets from every really knowing which offer was made first.
The irony, or course, is that SEC regulations intended to benefit the consumer by guaranteeing the lowest price would actually turn back the clock ten years and re-institute the financial monopoly bemoaned by opponents of Social Security reform. In this way, dangerous SEC regulations would make anti-PRA arguments more tenable!
Unfortunately for the pro-regulation zealots, this scheme is not viable. Americans have had too much exposure to the wonders of decentralized stock trading to go backwards in time. The SEC’s failed assumption is that stock price is the consumer’s only concern; as the ECN proliferation has demonstrated, consumers are at least as concerned with brokerage fees and trading ease.
PRAs in a world of ECNs and Internet-brokerage firms will afford American consumers will unrivaled levels of freedom and empowerment. As more Americans learn everyday, substantive security comes from the private sector, not government redistribution.