Shiller Questions Bush Plan on Soc. Security

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http://www.msnbc.msn.com/id/7235244/

Nearly three-quarters of workers who opt for Social Security personal accounts under President Bush's "default" investment option are likely to earn less in benefits than those who stay with the traditional Social Security system, a prominent finance economist has concluded.

A new paper by Yale University economist Robert J. Shiller found that under Bush's default "life-cycle accounts," which shift assets from stocks to bonds over a worker's lifetime, nearly a third of workers would bring in less in benefits than if they remained in the traditional system. That analysis is based on historical rates of return in the United States. Using global rates of return, which Shiller says more closely track future conditions, life-cycle portfolios could be expected to fall short of the traditional system's returns 71 percent of the time.

Both the White House and the Social Security Administration have relied on historical returns in estimating the earnings of proposed personal investment accounts. Shiller used 91 computer simulations to analyze the past performance of stocks and bonds in a variety of portfolios. He measured the returns in 44-year increments, beginning in 1871, to approximate a worker's lifetime contributions to personal accounts.

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Here's the full text of Shiller's paper for those interested.

http://www.irrationalexuberance.com/shillersocsec.doc

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[Eagle43]

I saw this in the paper this a.m., and was gonna post it. But, I had no idea who Shiller was/is.

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Quote:

I saw this in the paper this a.m., and was gonna post it. *But, I had no idea who Shiller was/is.

Yale University Economics Professor Robert Shiller is the author of the best selling book Irrational Exuberance. He also compiled the 1871-2004 database of stock market returns that is the basis for FIRECalc and the REHP Safe Withdrawal Calculator.

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[charlie]

The problem pointed out by Shiller is caused by a
3% real rate of interest loan as explained in the
quote below. A change to 2% or the actual real
return on TIPS (near 2%) is more realistic and would
change the outcome dramatically and result in
outperforming the traditional retirement 98% of the
time. You need to read the link to understand this.

Beginning of quote:

But, according to the President’s plan, the personal account does not come for free. Indeed, there is a much-discussed budget problem that the President’s plan must allow for. A plan that simply allows workers to divert part of their Social Security contribution into a personal portfolio will mean that the government will no longer be able to use this part of current contributions to support the current beneficiaries of Social Security. The government will have to borrow money to make up for the money workers have diverted to the personal accounts. So, in an attempt to preserve balance over an infinite horizon, the plan specifies that when the individual finally retires, an “offset” value, the terminal value of the Social Security contributions cumulated at a 3% real interest rate, will be annuitized (converted into a series of payments for life, analogous to the payments that people make on mortgages) and subtracted from the traditional social security benefit. In addition to this reduced traditional benefit due to the offset, the worker will also get the lump sum value of the personal account. although he or she would be required to annuitize at least enough of that so that the combined traditional benefit and personal account would be above the poverty line, whenever there is enough in the personal account to make that possible. In effect, the worker has not really “diverted” his or her Social Security contributions into a personal account, but has merely borrowed from the government to invest in a personal account, and must eventually pay the loan back. The offset will eventually help the government deal with the debt it incurred to maintain benefits to retirees.

End of quote.

Cheers,

Charlie

[Eagle43]

http://www.townhall.com/columnists/a...20050324.shtml

Here's an article, part of which refers to Mr. Shiller.
Quote:

Desperate critics of personal accounts, tired of being caught fibbing about actual investment experience, have switched to hypothetical estimates of future investment returns. To make these hypothetical returns as low as possible, they first assume no more than half is invested in the stock market.

Jonathan Weisman of The Washington Post cites figures from Robert Shiller concerning a "life cycle" account that would have only 15 percent in stocks by age 60. Since Shiller calculates that U.S. stocks have long earned 6.8 percent a year in real terms, after adjusting for inflation, while bonds earn a more-variable 3 percent, any life cycle plan requiring a tiny share in stocks after middle age guarantees a low median return of only 3.4 percent. That is, he notes, "considerably below the 4.6 percent that the Social Security actuaries have assumed," because the actuaries assumed 50 percent in stocks (which is also much too low most of the time).

Weisman neglected to mention that Shiller found, "Workers could do better, of course, if they eschewed the life cycle accounts and went for 100 percent stocks. In this case ... the median net account is ... 10 times as large as with the baseline life cycle account. ... Workers who choose the 100 percent stocks option lose only 2 percent of the time."

In 1999, when Bill Clinton was president, Shiller appeared more worried about overtaxing younger people to subsidize retiring baby boomers. "We should do more yet to encourage saving," he wrote; "The younger people already have their own income concerns and needs without also having to bear the burden of the risks of the retired."

Shiller's figures reveal one genuine risk with personal accounts -- namely, that Congress might allow people too little choice between stocks and bonds. A 50-50 stock-bond split was originally mandated for 529 college savings plans, which has now been wisely scrapped. The notion that bonds are safer than stocks is a particularly risky illusion. Indeed, Shiller's study shows, "the outcome of a portfolio of 100 percent bonds is terrible. The final balance is negative 89 percent of the time." The value of bonds falls when interest rates rise, so investors in "safe" U.S. Treasury bonds have frequently been clobbered by big capital losses.

cut for brevity....and the article ends..

In the future, the relative payback from a lifetime of paying Social Security taxes will get much worse: "Since those people retiring in 2003 have not always paid into the system at the current high rate of 12.4 percent, their average tax rate is only 10.7 percent, assuming 40 years of work. This average tax rate will increase in later years, as future retirees have fewer years paid in at lower tax rates and more years paid in at higher rates."

Whenever economists or journalists pretend that Social Security offers a better or safer return than the stock market, just remember Don Luskin's apt phrase about "the conspiracy to keep you poor and stupid."
Unquote

100% stocks, anyone??