t is now generally accepted that under present law Social Security taxes will not be adequate to meet promised Social Security benefits. Ths I financial dilemma reflects a demographic reality; the available number of workers to be taxed will be insufficient to pay benefits at current levels to an ever-increasing number of retirees who are living longer. As our political, academic, and business leaders wrestle with this problem, more and more often they suggest moving toward a saving and investment structure wherein some portion of the Social Security tax is invested in markets. Advocates of this view argue that because market returns are greater than those from the present pay-as-you-go system, tax increases or benefit cuts will be less onerous. Opponents, although largely agreeing, cite numerous and formidable risks associated with markets. These risks, they suggest, may be so grave as to reject a marketbased option. Are they correct? Moving from a pay-as-you-go system to a market-based structure necessitates a transition requiring some form of bridge financing, the structure of which may be critical to the success of any private alternative. This article does not analyze the transition, per se, but rather examines the arguments against the use of markets to finance retirement benefits. Among other issues, it looks at market risk, retirement benefits of low-income workers in a privatized structure, potential difficulties for unsophisticated investors in a market-based system, and the plight of survivors of deceased workers. Any politically acceptable alternative to the current payas-you-go Social Security system must adequately respond to these reasonable concerns. Our analysis will show that each objection is either factually incorrect or has a well-tested solution already in use.

Common Objections to a Market-Based Social Security System: A Response

C demographics are forcing countries around the world to reexamine their public pension systems. The member states of the European Union are no exception. Indeed, the EU nations are among those facing the greatest social, budgetary, and economic challenges as a result of their aging populations. Therefore, EU members will be forced to rethink their public pension programs and move away from traditional pay-as-you-go (PAYGO) pension models to new systems based on savings and investment. The need for pension reform has engendered heated political debate in Europe. In many ways that debate mirrors the debate over Social Security reform in the United States. This paper examines many of the issues involved in reforming European pensions and reaches the following conclusions: • Long-run data from many countries show that the yield on market assets is sufficient to provide adequate retirement income at a reasonable cost. Indeed, such income is likely to be significantly higher than income that can be provided through PAYGO systems. • A market-based system would not necessarily reduce the redistribution that some Europeans consider an important characteristic of EU pension programs. Moreover, those programs may be far less redistributive than commonly believed. • Moving to a market-based pension system can help promote labor market flexibility by more closely linking contributions and benefits. In addition, a market-based system would eliminate incentives for older workers to leave labor markets prematurely. • Although transition financing would be a complex issue, it is cheaper to move to market-based systems than to continue current PAYGO systems. It is possible to design a transition scenario that is a winwin situation for all generations. • Administrative costs in a market-based system can be kept low. • Market-based systems would increase asset ownership and give workers greater control of the wealth-producing assets of society.

Retirement Finance Reform Issues Facing the European Union

This paper examines the relationship between corporate borrowing and monopoly power under the assumption that the objective of the firm is to maximize the probability of long-run survival. Time-series data for each of twenty-five large industrial corporations and covering the period 1955 to 1981 are used for this purpose. The estimation results indicate that, as expected, corporate borrowing is inversely related to monopoly power as measured by Tobin's q. Copyright 1991 by Blackwell Publishers Ltd and The Victoria University of Manchester

The financial consequences of monopoly power

J oseph E. Granville may have the most spectacular stock market forecasting record in the world today. In a weekly market newsletter he predicts when the Dow Jones Industrial Average (DJIA) is going to go up and when it is going to go down. He does not issue forecasts for very short term moves but rather for moves that have a duration of a month or more and are likely to be changes of 10% or so. For the last three years, Granville has been forecasting the direction of the DJIA without the usual double talk in market newsletters. He tells the investor to be 100% long, or 100% short, or, in the case of one 2-week period, \"hold.\" Granville's view is that the market is a tide and the stocks are boats carried by that tide. When the market is moving up, nearly all stocks are carried up with it. When the market is moving down, nearly all stocks are carried down with it. Granville is willing to forecast the movement of individual stocks that he thinks will move against the market, but, since these are relatively few in number, he omits this from his advice to subscribers. He also may recommend certain stocks that he thinks will move very strongly in the same direction as his market forecast . Thanks to Granville's unusual record (only for forecasting the direction of the DJIA) and his extensive worldwide series of speaking engagements, he has developed an enormous following. His $250 a year newsletter has more than 20,000 subscribers; his telegraphic early warning system has more than 1,000 subscribers at $500 a year. Add to this his tape cassette learning system and other revenues, and he now grosses more than $6 million a year. To avoid a conflict of interest between his own investments and his recommendations to subscribers, Granville states emphatically that he does not invest his money in the stock market. To do so would generate a potential conflict of interest and could reduce his objectivity in analyzing the market. An indication of Granville's enormous following occurred on Monday, April 21,1980. Over the preceding weekend, he sent a telegraphic early warning to subscribers to tell them that he was changing his recommendation to 100% long. He also suggested several specific stocks that he thought would be good buys at this point. When the market opened, it gapped up on heavy volume. The influx of buy orders for the specific stocks that Granville recommended was so large that trading in them was suspended. The market closed up approximately 30 points on the day. Afterward, Granville was asked how much his recommendation had to do with the 30-point move. He said that perhaps 5 or 6 points of it were due to his recommendations, but that the rest was because the market

RansonR. David

Papers

Institutional Buying Power and the Stock Market