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They can earn a modest but risk-free interest from an ordinary savings account. They can also invest in treasury notes and bonds. There is not much to understand about sovereign debt. Going back to JakeS' logic
The intuitively obvious corollary to this is that we need to get out of the private pension funds mindset - by their very nature, private pension funds make Joe Schmoe an investor in the securities markets. And Joe Schmoe knows nothing about investing in the securities market, so he shouldn't be doing it.
the way I put it is this:

We understand that "widows and orphans" shouldn't be investing in risky assets and so we create "pension funds" subjected to strict regulations on the kinds of assets they may hold (e.g., no "speculative" or worse-rated bonds) and the kinds of strategies they may pursue (e.g., no "short-selling") so that they may be "safe" for widows and orphans to invest in. But that means that we regulate pension funds to behave like widows and orphans, so they get scalped by sharks like widows and orphans would.

In addition, the whole "private pension fund mindset" is predicated on the argument that public pensions are insolvent because they will eventually be unable to pay the promised premiums. We are told that instead we should invest in private pension funds. But the question arises: if the government is not going to be able to raise the necessary cash to meet its pension liabilities, where is the stock market supposed to get all that cash from? After all, the government and the stock market share in the same GDP pool. In addition, the government's "cost of capital" is lowest (in absolute terms considering "cost of debt" and relatively speaking when "risk-adjusted").

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sat Feb 7th, 2009 at 05:47:26 PM EST
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