Trends in participation levels in employer sponsored plans has nothing to do with my point. My cite that only 50% of people participate in employer sponsored plans is simply a data point that reflects all of the people ignored by the study you reference, which discusses investment performance and asset allocation in self directed retirement plans.
I don’t see where it says that the money spent by congress from the social security fund doesn’t earn interst. I think it merely says that it doesn’t count as part of the budget deficit if social seucrity money is used to pay for stuff.
Well, maybe I’m not getting it but what I am hearing is:
Most of the money that we pay in is not earing interest because it is being used to pay current beneficiaries. But you agree that the money that isn’t used to pay current beneficiaries is earning interst.
If we had private accounts then we could all retire millionaires. And there could be another system that would take care of the safety net aspect of the system.
We can figure out where to get the money to pay current beneficiaries if we would all sign on to private accounts.
OK, you figure out a way to fund the transition cost and the social safety net and I agree that private accounts are as good an idea as any forced savings program
(I would still have problems with the stock market, First 12% is unrealistically high by almost any account; second 12% on 4500/year over 35 years is only 2 million 500K of we use a more realistic 6% rate of return, over 45 years a 12% return is 7 million only 1 million if we use a more realistic 6% rate of return; the stock market is risky, there are still market risks; the current domestic stock market is worthless than 50 trillion dollars, if you pour just half of what would be in the social security trust fund into common stock (and there is not a single credible private account proposal that even goes that far) you would be dumping another 5 trillion dollars into the stock market, that seems problematic to me).
No. It’s not. It’s what the stock market has returned over the past 50 years, as my cite shows. If anything it’s a conservative number. I expect to get more than that, since small caps return even higher and I’m weighted more heavily in them than the overall market.
But, it doesn’t even matter. Even if we use a conservative 10% or a really conservative 8%, the returns by investing with compounding interest are huge.
So what? I used 45 years, not 35. I figured a worker only making 30K probably didn’t go to college, so he started working at age 20. Any investment company would urge people to start early because of the big difference that those extra ten years make.
Six percent is about what you can expect for a return on the money once you’ve retired and have it safely invested. Using this as an expectation of the return of the stock market is just silly. It’s half what it should be. However, even with this low rate we still would do much better with a private account than with social security as it’s currently set up.
This is a valid consern. However, it wouldn’t happen overnight. It would be gradual. As people add more money to thier private accounts the amount of people investing in the stock market would go up, as would the market’s overall value. That’s not a bad thing.
I guess we are never going to agree on the actual expected return on the equity market. I think the guaranteed returns of government debt are the only appropriate investment vehicle for social security funds and you think we should be able to invest in a broad well diversified equity portfolio. I don’t remember a link other than from motley fool. maybe a few quotes from Warren Buffett will make you think twice about that 12% return assumption:
If you think you can do better then you are bascially saying that you aren’t going to buy the whole basket, in which case you are stockpicking. Its one thing is Warren Buffett is doing the stock picking; its an entirely different thing to base the expected return on “equities” on stockpicking, when you talk about the returns from the equity market, over the long term you are constrained by reality, real growth, real income.
Here is a link with some additional analysis:
http://hussman.net/html/longterm.htm
http://www.economymodels.com/stockstime.asp
There are plenty of people out there saying that the stock market can continue to generate returns that exceed the growth of the companies underlying the stock due to expanding P/E ratios but noone seems to address how sustainable this sort of growth is over the long term. It certainly doesn’t mean that the sort of returns you envision are anywhere near guaranteed. When the markets fail is precisely when the safety net of a social security system are likely to be most needed (the entire reason we created the sopcial security systm was in response to a catastrophic market failure).
Don’t get me wrong. I am 100% invested in stocks, I own no mutual funds (except some shares of BRK which I guess you could call an insurance company wrapped around a closed ended mutual fund) but I just don’t think that the national “bottom dollar” (the social safety net, the fallback when all else has failed) should be invested in the stock market.
If you want to argue that the money you pay in should be sitting there for you earning the risk free rate, then fine I agree with you but how would you cover the transition costs. As far as I can tell removing the social security cap will do nothing because it will just increase the size of the private accounts for the people who are paying more into social security, diverting only a portion of the payments will only make the current system insovent that much sooner (unless you are willing to screw the baby boom geneeration). If you think making it need based will make it work, I know an army of trust and estate lawyers who will disagree with you and they will line up to tell me how I can keep my social security benefits by shifting all my assets to a private foundation or something. So once you figure out how to fund the transition costs then figure out how to fund the social safety net that social security provides for those people who end up investing in the wrong things or achieve subpar returns. Then you have got my ear, otherwise I would ask you if YOU would be willing to have this transition occur when you are 55 and privitization would bankrupt social security by the time you retire but you will have a little bit of money in your private account due to the phased privitization. Perhaps we can increase income taxes until we cover the shortfall (this amounts to a 15% increase in income taxes for about a generation), but then the burden will fall on current wage earners and something tell me that not what you want either because then you could just as easily put that money aside yourself and get the same results as what you are proposing AND keep your defined benefits under social security.
The transition costs of privitization are basically insurmountable.
The effect of injecting all that money into the private equity market (even over decades) would have a huge distortive effect on the market. We are already facing a demogaphically induced drop in the stock market as baby boomers start to shift their stocks into income generating investments (just as we had a demographically induced rise in the market over the last 20 years or so as baby boomers invested their money in the stock market).
Debaser:
I directed a post at you #136 but accidently headed it “Evil Captor.”
OK, Scylla, I missed that one entirely.
I’ve never said it was a “real” number in the sense that it takes into effect inflation. I consider inflation the 3% minimum that you need to beat, not a 0 level that you start out from. That’s how most investment companies I’ve dealt with look at it and how most threads on the subject on the SDMB handle it. I certainly don’t think it’s “bullshit” to consider the numbers this way.
Yes, unadjusted, so you say it’s 10-11% and I say it’s 12%. We’re splitting hairs. As I said before, who cares? Either way the returns with compounding interest are huge. I can be conservative and say 10% and all my points still stand.
I’ve always heard it as more 12% stocks, 6-8% bonds, and 3% inflation. But, I think we’re both in the same ballpark. Why the nitpicking?
Either way col_10022’s assertation that the stock long term rate of return is 5-6% is just silly. I get over 5% on my paypal account for crying out loud. If stocks paid the same as a bank guaranteed investment, no one would ever buy stocks.
You are assuming too much here. I agree with you about standard deviations and the dangerous pitfall of assuming that since the stock market pays out 12% a year, I can pull out 6% every year and still be home free! I’m not saying that.
I’ve stated that upon retirement I would expect to earn a more modest 5% return on my portfolio (before inflation). So, I’m beating inflation by a bit, but I’m not invested in 100% stocks anymore since I need the money sooner. I’m no longer in it for the long term.
However, I’d still have some money in stocks, say 10-20%. The rest is money markets and bonds.
Once you need the money you get it someplace safe. Further, the closer you are to needing the money the more you move it into safe investments. (This hurts your returns, though.)
Like I said before, this is all nitpicking. The larger point stands that buy getting high rates of return from the stock market over a long time with compounding interest means you end up much better returns that a system where only scraps are invested and most money is simply collected and paid out without interest.
As I’ve said before, this is a serious concern and is worth discussing on it’s own. I agree there are unintended consequences here that we need to watch out for.