Loren Pechtel

A couple of problems that seriously distort the #'s:

1) Inflation. Yes, during the growth time you can simply subtract it from the yield. However, afterwards that doesn't work as the payout needs to increase. Sorry, but this math gets messy.

2) Any reasonable social security system will work like an annuity--those who die early subsidize those who die late. I think this can be modelled by simply figuring the capital to be consumed at your life expectancy, but I'm not sure.

Haener

Hitetlen,

It is not that I want to debunk your efforts as totally useless but the way you account for declining returns due to market influences is severly flawed. We shouldn't be interested in the outcome of one or two hypothetical scenarios in which a number of losses is arbitrarily suffered at a certain point of time.

Rather, we should be interested in the distribution of outcomes so that we can say that under certain assumptions as starting salary and # of working years and thelike we can determine what the changes are that someone would end up with a retirement income of less than X amount. Noting that this system would basically apply to all Americans, that is hundreds of millions of people, even a very small change of ending up with an unacceptable low retirement income would in practice apply to tens of thousends of people.

Of course, building a reliable model to produce a statistical distribution with so many variables is a hugely complicated task and I admit I will not be the one to develop it.

B_Sharp

The 'average' takes care of the losses. All losses are averaged out. BUT only when the term is long enough. 40 years is plenty long and probably very certain.

Equities (stocks) may require 40 years for 9.5% - 2% = 7.5% avg return.
Bonds may require less like 5 or 10 years for 3% - 2% = 1% avg return.

You definately should verify, multiple sources, the 1) term and 2) average rate for each 'investment class'. You would need 1) and 2) for a) Stocks, b) Bonds, c) Inflation etc...

An accurate number is better than ballpark numbers. Even I am getting a little senile :Cheeky: so for Stocks 9.5% rate, uninflation adjusted, is for either 20 year term or 40 year term or ... Should be re-checked.
No loss years for a sufficient enough term in years/decades. Loss years are offset by gain years for an overall positive average rate after inflation BUT long enough term. Although risk can NEVER be completely zero. That is another post.

15 times 15 equals 225 so that can't be true. What they mean is since 1920 Depression, there have been no periods of 15 or 20 years where Stocks took an overall loss. Could be greater than 20yrs, I am too lazy to check right now. I don't know if that factors in 2% inflation cuz that is important too.

But those are offset by immediate Boom gain years.

BTW a good market newletter, eg (c) "Money Talk", is a good investment of $100 a year. Bob Brinker is an expert. Buy his newletter and follow it and sleep at night.Loss periods do occur. A better way of saying it is cycles of Bulls and Bears, Major and Minor.

MAJOR & MINOR CYCLES
Over 70 or 100 years, there are Major trends of loss and gain. A 'Bull' trend is a gain while a 'Bear' trend is a loss. They can be from a few to maybe 20 years long.

The ratio is close 1:3. Bull gains occur 2/3 the time. Bear losses occur 1/3 the time.

Each Major Bull gain can have several alternating Minor Bull gains & Minor Bear losses. Conversly Major Bear loss can have several alternating Minor Bull gains & Minor Bear losses.

An informed 'Market Timer' investor is smart enough to avoid the 20% or 40% losses of Bear losses. The normal Joe Public is oblivious so yes they lose 2 or maybe 3 cycles of 20% or 40% losses in their lifetime. They did not want to make the effort.

And yes I did pull out ALL my investments to a safe place BEFORE the last Major Bear loss market correction. I lost nothing while others pained but they did not want to listen. It is not magic, but it takes a little research or just follow Bob Brinker.

The current Major Bear loss shall not recover until around year 2010. That is the best estimate by the few rare, informed money experts eg Damon Vickers.
NEVER listen to alphbet money folks like CNN, ABC, CBS, even not FOX, not even Wall Street Journal, not Motley Fool. They understand enough of money to be dangerous. They are Sales Reps masquerading.

Point is, Major cycles of up and down of 5 to 20 or more years and each containing Minor up and downs of 1 to a few years. 2/3 up. 1/3 down. Or for a given long term use average.

ref: Book: Stan Weinstein, "Secrets for Profiting in Bull & Bear Markets"

theyeti

No one disagrees that stock market investments, if they do well, will outperform SS. Of course SS is not an investment system to being with, so there's no reason to suspect differently. Since SS is pay-as-you-go, we can't reap the rewards of compound interest. We're effectively carrying around a large debt incurred when SS was started. In order to switch to an investment scheme (what the Bushies are sort-of proposing) we'd need to pay off this debt, otherwise an entire generation who paid into the system gets no benefits. So yes, an investment system (privatized or not) will produce bigger returns, but it requires a massive amount of up-front capital. Since we don't have that capital, we have to borrow it. This is basically buying stocks on margin, which is risky and definitely not recomended for retirement planning.

Even without going into debt, there's no guarantee that one's investments will do well. If the investments have a negative return, then obviously SS would have been the better option. For most people, that won't happen, but for some it will. Whether or not you think this is acceptable depends on what you think the purpose of SS is to begin with. SS is part of the social safety net -- it's purpose is to provide, at the very least, a guaranteed level of retirement income for all workers even if their personal savings go kaput for some reason. (And as we've seen with Enron, WorldCom, the Dot-com bubble, etc., this can and does happen.) The point of SS is to prevent poverty among the elderly, not to serve as the sole source of retirement income. SS should be considered, along with personal savings and pentions, one of the three main legs of retirement. Personal savings (invested in the stock market or elsewhere) give the biggest returns but carry the greatest risk. SS is the only one which is guaranteed. So while no one questions the ability of investments to give a greater return on average than SS, switching over would defeat the purpose.

theyeti

Rhea

The down years overlap, as I showed in the other thread, where you were posting so I assume you were reading. For example it was something like, "87, 88, 89 were the final years of a 15-year period that had a net negative return" something like that. So if you retired in either 87 or 88 or 89 you were retiring in a year wherein the last 15 years had represented a negative return to your investment.

"followed by boom years" like this will allow someone who is no longer depositing any money to ride it out or something.


Why do you guys keep ignoring this> You keep saying "long haul" and "over 40 years". And I ask, what on earth good does this do for the person who retired in 1987? What, do they change their age and try to wait it out - "use patience"

You guys keep ignoring this. Why?


Then you go on to say how savvy you are with your funds. The average American is not that savvy, doesn't have that much money to play and can't ride out those kinds of downs.

I'm saying yeah, savvy is great, I like it. But my neighbor isn't savvy. And my life is less good if my neighbor is destitute.

How many uproars when a neighborhood gots ruined by some factory or bar or pron shop? "My neighborhood is being dragged down!". This is true when your neighbors go destitute. Why do you ignore this?


I feel like you and others are completely ignoring huge populations of historically predictable people. Like you can make them go away or "just get smarter" or something. History shows they don't. History also shows the broken window syndrome is real. A little effort to fix the broken windows and we're all better off.

And the numbers y'all are giving just don't add up. Ignore this and that and this other - and what you have is a superficial look at a system claiming, "well there's your trouble!" when in fact you ignored over half of the factors. Then you make the same claim again, never addressing the holes in the theory.




Why do you ignore that there were 15 years in the last 70 which capped a 15 year market yielding less than 3%? Why do you ignore that there were 6 years capping a 15-year negative return? How can you say that an individual who turns 65 whether they want to or not has some ability to change his position in "the long haul"?


How can we take you seriously when you make claims like there are never any loss years?

unrealist42

For any retirement scheme to actually work investment has to be mandatory and inaccessible. Otherwise very few will participate and the govt will end up with their destitute asses in any case.

People with access to retirement funds will often spend them. For example many people get their defined benefit pension money when they leave a company and end up spending it so they can survive between jobs.

Another thing, anyone making survival wages is not saving at all for anything so any discussion of some low income person voluntarily saving for retirement is just ignorant.

How many people actually have IRAs?
I think its something like 5% and half of those get cashed in before retirement.
So much for voluntary savings for retirement.

Chile has had a private pension program for 25 years and the first fully vested workers are now retiring. They are recieving, on average, some 10% of what those who stayed in the traditional SS type system are getting. The govt of Chile is spending some $3Billion a year on social services for these destitute pensioners. Ministers have resigned. It is a national scandal.

So much for private accounts.

For years those who would get rid of SS pointed to Chile as a model for how the US pension system should be overhauled. They don't talk about Chile anymore but are still pushing ahead with this disasterous idea. It has nothing to do with economics and everything to do with ideology.

By the way, if the projections for economic growth and interest rates used for the returns expected on private accounts are applied to SS, it will be fully funded and there will be no crises at all.
So much for economics

Hitetlen

The numbers that I chose are abysmal, and they still outperform SS. What percentage of the people goes from 10,000 a year to 15,000 a year in 40 years as their total income? How many people are willing to stay with a job if they can get 1% raise only?

This post was not supposed answer the question of transition from SS to to an investment system. It was created to simply show that an investment system is superior to the SS. As for the transition period, I would suggest that the federal government should sell some of its HUGE holdings of real estate it commands, and finance the transition period. But this is not part of the problem I am presenting.

Not if it starts small and is allowed to grow.

Don't forget that SS is not supposed to be the sole source of income for the retirement years. To be blunt: with SS as the only income everyone would starve! Investment at the very least gives most people an independent retirement capability, and even the poorest can get more money than they had under the SS scenario. in the examples I showed they not only have more income, but also had a sizeable chunk of money to begin with.

Hitetlen

But they are not used and cannot be used - by law. Economics works, politics does not.

wdog

huh neat, we keep going....

just one point to Rhea especially. I want to emphasize again how weird it is to try and calculate returns on the so called SSI trust fund. This fund invests in US bonds just as you and i would buy bonds. Normally when ordinary people then redeem their bonds it is not a big deal as the treasury has enough cash on hand to handle the volume and many others are buying at the same time. Also again by loaning money to the government you are betting on the future taxing, borrowing, or money printing power of the US govt. This gets strange when considering the enormous size of the future obligations along with the size of the general level of debt. In the end it is the taxpayer who will have to foot the bill one way or another- In other words the trust fund may be earning 4% on paper but guess who is paying that 4%?

well yeah it sure is possible to not come out too well after only 15 years, but who works that long? Just a note, the 87 market recovered in only 1 year.

More important though if one simply uses a standard portfolio of a total market fund (all stocks, bonds, real estate) its pretty hard to lose over 15 years. In my particular example is would be pretty easy to beat my real SSI return as it is negative. If however a person wants to become a trader instead of an investor (quite easy to prevent in a retirement account, for one thing only offer diversified funds) then no amount of time is safe.



While for me personally I am more of a purist like Hitetlen, I can think of one great way we could have handled this trust fund better. If we had started a real fund like an employees pension fund (OPERS, teachers union, etc.) and made the first generations pay more, I calculate it would have to be about $7 trillion right now to support SSI assuming about a 4% rate of return. Now unquestionably you can't just chuck that amount of cash in only the US stock market since it would so distort it as to be self defeating. Some would still have to be pay as you go in the form of US bonds as now. I think that with a total world market (stocks- bonds -real estate) of about $80 trillion right now we could have 4-5 trillion of SSI funds into other types of investments safely. This system would have the nice feature that since it becomes somewhat self sustaining that input taxes could be lighter, the money is probably better invested and leading to higher economic returns, and it doesn't depend on a certain worker to retiree ratio to function.


Ah well, idle chat... SSI isn't even the worst of it, the rest of the government checkbook looks terrible.

yes it can be done. modern portfolio theory uses what are called monte carlo methods to do this.

Here's another potential answer to the problem though. In the pooled fund we can still pull out individual returns on a per share basis. In that way market volatility can be smoothed over and one could even say that the fund will pay a smoothed 20 year averaged return to individuals. There are many tools to alleviate risk.

As an individual investor though I don't much care. I simply will do all this for myself as best i can.

Rhea

No they wouldn't starve. something like 40% of eleders are on soc sec alone and not starving (barely?)

Yes it's not supposed to be the only. YES I agree! But for many it is the only and should be enough to not starve.


"even the poorest can get more than soc sec" I disagree. It would have to be managed by the gov't. These are the people who spend 50-100 a week on the lottery. They don't understand odds and risks. They WILL blow it. If it's going to be gov't controlled, do better with the fund.


Putting it in individual hands has a history of not working. We *have* been there and done that. Why do you keep ignoring this?