With Social Security Privatization, Timing Matters - For Some More than for Others

There are plenty of complex words Americans better become fluent with if the president gets his way on Social Security privatization: 'rate of return', 'diversification', 'life cycle portfolio', 'annuitization' and on and on. But there is one term most stockbrokers and most Americans are familiar with: 'timing' - buying low and selling high. If it were only that easy. That's why experts on Wall Street get paid the big bucks. While we gamble, they place educated bets.

But even if all Americans understood the layers of complexity of the stock market, capital appreciation, dividend yields, and fixed income instrument, and knew exactly when to buy low and sell high, many Americans would realize they don't have the money to invest when the timing is just right.

That's because the timing of other factors is beyond their control, like the job market and wage growth. Whether somebody can take advantage of the best buying opportunities, will depend on whether they have a job and a decent wage, and thus extra cash to invest when stock prices are low. Unfortunately many Americans, particularly women and minorities, are less likely than others to have a well-paying job when stock prices are low and the economy is weak. Hence, they end up with fewer savings for each dollar they put away than men and whites.

A quick glance at timing, the sequence in which stock prices, jobs and wages rise and fall, reveal why women and minorities get the short end of the privatization stick. During a recession, stock prices are typically lower, but people are also either out of a job or they have less money. For instance, employers give fewer pay raises, there is less need for overtime and smaller chances for a bonus. Also, stock prices climb before jobs and wages really take off again because stock investors speculate on future growth opportunities, while employers wait to hire and pay more until those growth opportunities materialize. Hence, because the rising of stock prices precedes more jobs and better wages, people lose out on the "buy low, sell high" deal.

But the labor market doesn't treat everyone equally. Fluctuations in wages and job security for women and minorities are more pronounced than for men and whites. Specifically, in addition to being significantly lower, women's wages fluctuate more heavily than men's. Similarly, African-Americans have lower wages, higher unemployment rates and greater fluctuations in their employment opportunities than whites.

All of these regularities have one result. Women and minorities have less money than men have to buy stocks when stock prices are low and when they have money, stock prices are already high again. Stock prices are lower during bad economic times, when women are more likely than men to see drops in their earnings and when minorities are more likely than whites to be out of a job. By the time women and minorities see wage gains and job opportunities really pick up again, stock prices have already risen too high where they can really benefit from market gains. Women and minorities thus typically buy stocks at higher prices than men and whites just because of their different labor market experiences.

Does this really matter?

Over the course of a life time, this bad timing will amount to substantial losses of savings, making the disadvantaged even more so. Already, women and minorities earn less than men and whites, leading to much lower savings. Social Security privatization will only exacerbate this disparity.

Clearly, market timing matters. But for most Americans, the timing of pay raises and unemployment matters more. Without extra cash to invest when stock prices are low, mastering market timing means very little. And while mastering the market may be within people's control, often times the fluctuations of the labor market and the macro economy are far beyond their control.

Already, people's retirement savings - their 401(k)s and IRAs - are exposed to these fluctuations. Social Security, as it stands now, helps compensate for some of the disparities among demographic groups. Unfortunately, if the president gets his way, Social Security privatization would leave the rest of Americans' retirement exposed to the same fluctuations and at the uncontrolled whims of the stock and labor markets.

Christian E. Weller is a senior economist at the Center for American Progress.