WSJ Article on Private Accounts

[adios]

This doesn't look like a great deal to me. A return of 3% above inflation is actually decent (i.e. if the government keeps it's promises) without taking much risk. The Fed supposedly targets inflation rates of between 2% and 3% which means the government is claiming a rate of return of between 5% and 6% for payroll taxes. I believe that the inflation rate for 2004 was something like 1.8%. Currently the 30 year Treasury is yielding 4.47% which would give it a real rate of 2.67%. From the article:

On average, the White House is figuring private accounts invested in a mix of stocks and bonds will earn a 4.6% rate of return above inflation, after the cost of the government administering the accounts is subtracted. The White House also says a worker who invests exclusively in Treasury bonds can expect about a 3% return after inflation -- and would get just as much from opting for a private account as he or she would from sticking with the traditional Social Security program. A retiree whose account earns less than 3% after inflation would be worse off than if he or she sticks with traditional Social Security.

My understanding was the S.S. didn't do nearly this well. What about this Eldyna, let's see your figures on this. After reading this article I have more questions than answers about what is going on.

Private Accounts Win
When Invested Well

Bush's Social Security Plan Requires
More Than 3% Real Rate of Return
To Come Out Ahead
By JACKIE CALMES and GREG IP
Staff Reporters of THE WALL STREET JOURNAL
February 4, 2005; Page A5

WASHINGTON -- President Bush says private investment accounts he wants to allow workers to carve from their Social Security payroll taxes "are a better deal" than relying on traditional Social Security retirement benefits.

Whether that is true depends on how much workers put in the accounts and how well their stock and bond investments fare. It also hinges on how much the government reduces their monthly Social Security benefits to reflect the fact that some of their payroll taxes were diverted from the government program and into private accounts.

Mr. Bush didn't talk about this offset in his State of the Union address, but White House aides did. "In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system," a senior official said at a briefing.


"The person comes out ahead," the official added, "if their personal account exceeds a 3% real rate of return" -- that is, the yield that Social Security gets on its Treasury-bond holdings on top of the inflation rate. "To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence." Under White House ground rules, reporters weren't allowed to identify the official by name.

The offset is designed to protect the Social Security system's long-term finances, given that a significant part of its revenue is being diverted to private accounts. To strengthen the system's finances, Mr. Bush separately is proposing to reduce promised benefits across the board, but he hasn't offered details.

On average, the White House is figuring private accounts invested in a mix of stocks and bonds will earn a 4.6% rate of return above inflation, after the cost of the government administering the accounts is subtracted. The White House also says a worker who invests exclusively in Treasury bonds can expect about a 3% return after inflation -- and would get just as much from opting for a private account as he or she would from sticking with the traditional Social Security program. A retiree whose account earns less than 3% after inflation would be worse off than if he or she sticks with traditional Social Security.

The White House's use of the 3% to calculate the offset rate is less generous to workers who opt for private accounts than the proposal crafted by a commission Mr. Bush appointed during his first term. The commission proposal, which is the basis for much of the president's current plan, used a 2% rate. The change saves the government money, but makes the private-account option less attractive to workers.

Despite that, the administration still assumes two-thirds of eligible workers would select the accounts, the same proportion Social Security actuaries said was appropriate for the commission plan with a 2% offset rate. With a 3% offset, "this is not an overwhelmingly attractive option," said Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School, author of the best-selling "Stocks for the Long Run" and an advocate of private accounts.

Private accounts may be even less attractive given that some experts predict stock and bond returns will be much lower than in the past couple of decades, reflecting much higher stock valuations and lower bond yields.

The administration cites Social Security actuarial estimates that a portfolio of 50% stocks, 30% corporate bonds and 20% government bonds can be expected to return 4.6% a year after inflation and expenses in the future. But Mr. Siegel thinks 3.9% is a more-realistic estimate, a relatively skimpy premium over the 3%. With that prospective return, he calculates an investor has an 84% chance of being better off with the private account over 30 years, compared with a 98% chance if the offset rate were only 2%.

In a Wednesday briefing, an administration official also cited the apparently handsome nominal returns earned in the past 10 years in the government thrift plan: 11% in its large-capitalization stock fund, 9.7% for the small-cap stock fund, and 6% for the short-term bond fund. But subtracting the average 2.4% inflation rate of the past 10 years shows more-modest real returns.

Moreover, the stock returns reflect a period of double-digit-percentage gains in the late 1990s that are unlikely to repeat. Ed Keon, a strategist at Prudential Equity Group, notes much of those returns came not from earnings, but from the rise in the valuation investors put on those earnings that is the price-to-earnings ratio. "Unless you think valuations will rise indefinitely in the future, returns will be lower." Mr. Keon said he would advise a client to be "careful" about choosing a private account as currently proposed over traditional Social Security.

[BCPVP]

Economists back idea of private accounts, raise issues
By Barbara Hagenbaugh, USA TODAY

WASHINGTON — When President Bush pitches his desire to partially privatize Social Security in his State of the Union address tonight, he'll have one group of supporters behind him: economists.

In response to a survey by USA TODAY Jan. 21-27, nearly three-quarters of 53 economists said they supported private accounts. (Related: Survey: Economists forecast steady growth in 2005)

But their support wasn't without caution. Three-quarters, including many who said they supported privatization, said they were "somewhat" or "very" concerned about the potential impact that funding the plan could have on markets.

And several economists offered caveats for their support, arguing partial privatization needed to be constructed so that workers couldn't blow their money on stocks in fly-by-night companies or seek a bailout if their investments went awry. Others argued private accounts would be only a partial solution to the Social Security funding issue, not the total answer.

Some economists in the survey — including some who said they were against privatization — work for investment firms that could gain from private accounts, depending on how the program were structured.

Ken Mayland, president of ClearView Economics, a research and forecasting firm, argues private accounts would give workers some control over their savings.

"People will have something that they can call their own. Whether rich, poor, it's yours," he says.

Bush is expected to promote private accounts for Social Security in his annual address to Congress tonight. Although he has not offered a specific proposal, private accounts would allow younger workers to divert a small portion of their payroll taxes into investment accounts similar to 401(k)s.

Some economists, including those at Economy.com, Putnam Investments and Lehman Bros., argued against private accounts because they would force the government to go further into debt to fund benefits. Others were concerned about how the extra money being invested in stocks and bonds by workers would influence financial markets.

"I'm afraid of what all this new money ... what impact that is going to have on stocks? Could it create another stock market bubble?" Bank of Tokyo-Mitsubishi chief financial economist Christopher Rupkey says. "There are a lot of risks to it, and it is something that shouldn't be rushed."

Contributing: Barbara Hansen
http://www.usatoday.com/news/washing...soc-usat_x.htm

[BCPVP]

In fact, let's turn to the president who enacted Social Security, FDR!
" In the important field of security for our old people, it seems necessary to adopt three principles--first, noncontributory old-age pensions for those who are now too old to build up their own insurance; it is, of course, clear that for perhaps thirty years to come funds will have to be provided by the states and the federal government to meet these pensions. Second, compulsory contributory annuities, which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the federal government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."
http://www.search.eb.com/elections/pri/Q00111.html
This is a message to Congress delivered by FDR in 1934. Seems he supported private accounts as well. Take that Chuck Schumer!!!

[Wake up CALL]

Adios,

Your post is too factual for the Liberals. They much prefer to bash the administration in a futile attempt to create a political hot potato compared to listening to reason.

[TransientR]

If you read the unbiased (lol) WSJ re. private accounts, you should also read this:

http://www.brookings.edu/printme.wbs...3d0a141465.xml

Undoubtedly just dimwitted liberal nitpicking in your view.

Frank

[Wake up CALL]

[ QUOTE ]
Undoubtedly just dimwitted liberal nitpicking in your view.


[/ QUOTE ]

Not nitpicking, just incorrect assumptions and carefully chosen case scenarios. In other words, typical Liberal scare tactics used to prove (LMAO) that the government knows better than I know how to manage my own money.

See Adios, I told you so. [img]/images/graemlins/smile.gif[/img]

[adios]

Yeah I do. I'm sure he won't admit it if he did but I'd guess that the odds are much better than 50-50 that TransientR saves for his retirement in private accounts.

[Voltron87]

Private account reform of SS is a terrible idea, and Bush probably isn't going to get is reform through. Saving money and investing when you're young is a great idea, everyone should do it, but that is not the purpose of SS. Not to say SS doesn't need reform, it does, the country's demographics and retirement needs will change over the next 5 decades, but private account reform is not a way to save SS.

[Wake up CALL]

[ QUOTE ]
Private account reform of SS is a terrible idea, and Bush probably isn't going to get is reform through. Saving money and investing when you're young is a great idea, everyone should do it, but that is not the purpose of SS. Not to say SS doesn't need reform, it does, the country's demographics and retirement needs will change over the next 5 decades, but private account reform is not a way to save SS.

[/ QUOTE ]

And here is your typical Liberal perspective. I don't know exactly what the problem is or how to fix it but I know your solution won't work. Doesn't the Democratic party have any ideas of their own or are they just against anything other than than the status quo?

[Voltron87]

The concept of SS is not broken... your reply doesn't make much sense and doesn't have much to do with what I said.