Thursday, March 26, 2009

Forbes: Social Security retirement math

I have an article in the latest issue of Forbes summarizing my earlier work on how Social Security accounts might have fared in the current market environment. While the numbers are the most surprising part, the conclusion is what's more important.

The point here isn't that stocks are a free lunch. In an efficient market the higher returns paid to stocks are nothing more than compensation for their higher risk, and we don't know that future market returns will be as good as those in the past. But accounts do provide a valuable tool to prefund future retirement income and reduce cost burdens on tomorrow's workers. And these numbers put the lie to President Obama's exaggerations of the risks of investing retirement savings in the market.

Click here to read the whole piece.

1 comment:

Anonymous said...

I left the following questions/comments on Forbes and was wondering if you might comment:

First, you simulated returns of those who held accounts their entire lives and retired this year at 65. This might assume they began working in about 1964 at age 21. In 1964 the Social Security payroll tax was 7.25% vs. the current 12.4%. Did you reduce the contribution level proportionately in earlier years?

Second, were the bond and stock returns you used based on historic passive indices, and if so, did you add in management fees? Unless the provider is Vanguard, it wouldn't be unreasonable to add an annual 0.5% fee into the calculation.

Third, do you propose that participants us a low-cost Thrift Savings Plan-type investment fund? Opening up the plan to banks, brokerage firms and mutual fund providers would be chaotic.

At retirement, unless the annuity allows inheritability and the Social Security Administration provide the annuity I wouldn't want it. Annuity fees are notoriously high at insurance companies and other investment providers and credit-worthiness would be a huge problem. Imagine if AIG were your annuity provider.

Finally, the 15% equity allocation of a life-cycle portfolio is an extremely low equity asset allocation. I don't know of any investment professional who would suggest such a low equity allocation ten years prior to retirement.