The Tim Lee Social Security Calculator
Ygelesias, among others, is skeptical of the various pro-reform social security calculators. My colleague Tim Lee responds. Here’s a bit:
More to the point, even if you grant all of Matt’s objections, personal accounts still end up doing better. I whipped up a little calculator of my own, which does the math in a transparent fashion. Cato’s calculator says that if I start out at 25,000 at age 25, that I’ll end up with a stock portfolio of $406,000 and an annuity of $38,685. My calculator more or less duplicates that result. If we grant all of Matt’s objections and use a 4.2% rate of return (60% stocks at 5%, 40% bonds at 3%, with let’s say a higher .5% transaction cost), then my personal account still ends up being worth $310,000. And if we assume the annuity pays out a conservative 7%, instead of Cato’s assumption of 9%, I would still end up with an annual benefit of about $22,000. According to Cato’s calculator, Social Security would pay $15,748 for the same wage profile.
Check out the whole thing.
January 30th, 2005 03:14
A few things missing from your calcs:
1. Many plans to privatize SS, including Cato’s, presumes a large chunk of your money will be put into money market accounts for safety…these are currently paying less than 2% returns.
2. There is usually a fee of around 10-15% of up front assets that is charged when buying an annuity.
3. If you live longer than your annuity, you be eatin’ dogfood and sleeping in doorways. Social Security pays you until your dead.
4. The stock markets have lost over 50% of their value several times in the last decade. If this happens at the time you retire…ouch!
Calculations made with all sunny estimates of the future hardly give a realistic look at private accounts. When the risks are factored in…the current system looks pretty good.
January 30th, 2005 14:39
Would you favor the current SS over “privatization” if it promised to pay more then you could expect to get via the “private” account?
If not, who needs the comparisons?
January 30th, 2005 16:01
Monkeyboy’s understanding of personal finance leaves much to be desired. First, there’s some confusion as to what it means to ‘annuitize’ your retirement account. It doesn’t necessarily mean buying an annuity. It means beginning a series of regular withdrawals that would deplete the account over your expected lifespan. Generally when doing this you use a conservative interest rate with the result being that the account actually continues to grow. This is done regularly now with IRAs.
Second, if monkeyboy is willing to pay a 10 to 15% front end load on an investment, I’d suggest that he probably is not a good candidate for a voluntary private account. He would do well to stay with the government system, even if benefits have to be reduced.
His third point is bogus. With a private account you should certainly have the option also of NOT annuitizing the entire amount and the calculators I’ve used actually assume that only a part is annuitized.
4th point. Retirement planning isn’t a decade long process, it’s a decadeS long process. Again, if Monkeyboy thinks that relying on stock (no bond?) gains during the last decade before retirement is a good idea, he’s not a good candidate to opt-out of the current system.
January 30th, 2005 19:06
I notice how you sidestep my first point, Tom. All the SS privatization plans I have seen, including Cato’s, assume at least one third of your money will be held in low interest money market accounts. Will’s ‘calculations’ put all his money in high paying stock/bond accounts.
I’m not the one leaving his money in risky investments up until the day I retire. Again, it’s Will who is making his ‘calculations’ assuming his money will be in stocks/bonds until the day he retires.
Will’s calculations assume an annuity payment that has no death benefits for any survivors you may have when you die. It shows a maximum payout with no survivor benefits. Letting your surviving spouse/children collect any remaining annuity payments costs money, a lot…
Is there an honest libertarian left in this country? The financial assumptions made for private accounts are ridiculously optimistic, while the assumptions made about the future of the current SS system are as gloomy as can be…
February 1st, 2005 16:12
Just Desserts?
It has occurred to me that I have been writing (badly, I might add) about several topics lately that are being discussed in a much more eloquent manner by Will Wilkinson. If you have some time check out th…
February 1st, 2005 21:36
Ultimately, monkyboy, that’s the whole problem that Will tried to address by looking at the moral aspect of the debate. Libertarians (and most conservatives) would rather risk lower returns personally and have more personal control. Liberals would risk lower returns as a trade off for more political control, especially federal level. For those who are committed to the political morality of moving power closer to the individual the numbers are admittedly secondary.
February 1st, 2005 23:09
Hmmm…I’m not sure where that puts me Tom. I’m not morally for or against the private accounts. I just think they will be too costly to implement, make a lot of rich people richer for zero work and add another layer of bureaucracy to the government…other than that, I’m for them
It seems like kind of a pointless battle to me.
Check out the savings rates of:
Europe - 20%
Japan - 25%
China - 50%
U.S. of A. - less than 1%
If the Republicans manage to get private accounts, the next time the Democrats are in power, they will just open them up so people can ‘borrow’ from them to fund medical expenses, college for the kids, home purchases, etc.
And then we’ll be back to where we started…coming up with a program to take care of needy seniors. Sad to say, the only way Americans can be made to save anything is to just take money from them and hide it in the federal budget.