Tuesday, March 18, 2008

From the archives: 2005 presentation on Shiller Social Security paper

While in the employ of the federal government I often did research work that didn't end up seeing the light of day. Most of it deservedly so, but in this case a presentation from back in 2005 may be of interest. At that time, Robert Shiller of Yale wrote a short paper using historical data arguing that President Bush's personal accounts plan would have been a bad deal for most participants.

Shiller's paper was widely cited at the time, but also widely misinterpreted, I believed. Using some very reasonable assumptions, Shiller's paper could be used to show that almost every cohort of personal account participants would have come out far ahead through participating -- an average of around $3,500 per year, in one case. I put together a presentation for the annual conference of the Association for Private Enterprise Education in Orlando. Here I've included the presentation with some explanatory notes.

In any event, the presentation is downloadable here.


Anonymous said...

"very reasonable assumptions"

ah, there's the rub.

have you ever read Jemima Puddleduck by Beatrix Potter?


Andrew G. Biggs said...

If you read the presentation and find any assumptions unreasonable, feel free to post them here and I'll be happy to address them.

Anonymous said...


as jemima would have told you... if she hadn't been a puddle duck... all the foxy whiskered gentleman's "assumptions" sounded reasonable.

they still added up to duck for dinner.

i have no doubt you and i can make more money on the stock market than we can with social security. i have very serious doubts that EVERYBODY can at the same time... without risk.

say, just for example, that the "average return on stocks" was about 10% as i read in a recent Social Security publication. what was less clearly explained was that about 25% of investors did no better than Social Security, and 16% of investors actually lost money.

those sorts of things tend to get lost when a great theorist is listing his "assumptions."

but, as long as we are here, i would nevertheless back a plan to add a PERS like retirement plan on top of Social Security. leaving SS exactly the way it is today. but taking part of the next few years routine cost of living raises and investing them in a private pension fund.

this would cost employers nothing, the workers would get their raises in the form of an asset. the privatizers should get what they want. and the workers would still have their SS to fall back on.

by 2040 it should be clear whether it would be necessary to increase the SS tax by 2% as projected, or just let the private accounts make up the difference (and more!)

but the privatizers don't push that plan, because they have another angenda entirely.

Bruce Webb said...

Well I read through the presentation and noted that it shared the typical weakness of all such plans, it never explains how this magic happens under Intermediate Cost economic assumptions.

Social Security outcomes are not static, both the magnitude of the gap between income and cost at depletion and the date of depletion itself are totally dependent on actual growth outcomes. Before we can take any privatization proposal seriously it will be necessary to front its internal projections for growth and to rescore Social Security under those new assumptions. Instead 'crisis' is always presented under the static model represented by Intermediate Cost. Make your PRA produce better outcomes at 1.7% productivity and 2.0% GDP than Social Security. And don't forget to show your work.

Andrew G. Biggs said...


Two quick points:

First, not every paper or presentation has to handle every aspect of the reform debate. (If so, we'd only write books, not papers!) This presentation worked through Shiller's paper and showed that his results are totally dependent on a policy switch -- whether the offset interest rate is set based on the projected trust fund return or adjusted based on the realized trust fund return -- that can easily be changed.

Second, Shiller himself looks at the possibility of much lower stock returns in the future, which is why he simulates accounts when the stock return is only 4.6%, versus 6.8% historical. What I show in slide 11 is that even with 4.6% stock returns, 96% of cohorts would have beaten the offset interest rate and would have increased their annual benefits by an average of $1,750.

Now, does this answer every question about Social Security reform? Of course not. But for those who took the Shiller paper very seriously, and a lot of people did, it shows that its conclusions are quite limited.