Posted on 03/25/2002 6:31:56 AM PST by Matchett-PI
Milton Friedman called these "...a very informative set of calculations."
The original Social Security program was designed 65 years ago in 1937. But it was fatally flawed because it did not adequately anticipate future rates of inflation or life expectancy. In 1937, CPI averaged 1.4% per year over the previous 25 years. Since then, it has averaged 4.0% per year. Life expectancy then was 60 years. Today it is 77. Any remedy to the present retirement system must comprehend and solve the unpleasant unpredictability of both these factors. What should be done? Abolishing the present system is the best solution to its problems and transitioning to a new, privatized plan as the old one is phased out. In the new plan, stocks will be safer than Treasury bonds in a pension-fund setting. It will cost remarkably less than the old. Life expectancy will not matter nor will the rate of inflation. Expansion of benefits will be possible. Further, the Treasury will be relieved permanently of an ever growing, ever taxing, ever losing proposition.
The present hue and cry about Enron and stock dangers to retirement systems are not relevant, nor the recent collapse of NASDAQ, nor presumed other risks, nor quarterly, annual, 3-, 5-, and 10-year performance reports, as we shall see. [SNIP]
On that we agree.
The problem with the whole "privatization" argument is that the history of returns on US stocks is a history of voluntary stock ownership. Remove that element and you change the entire character of the capital markets. It's astonishing to me how cavalierly that is dismissed, or even thought of. Voluntary ownership is precisely why the capital markets work as well as they do.
The trillions of SS funds are simply too big of an elephant. There is simply not enough room in the US stock market for what is there already and the SS funds. One of the self-adjustments will probably be a decline in ownership of US stocks outside of SS. Which is probably a bad thing, IMO.
Bottom line is that there is simply no feasible way to safely store for 40 years an amount of wealth comparable to one year's entire GDP.
That says a mouthful….How much will be needed 40 years from now…what about inflation and future increases in taxation.
I can recall in the early 70’s, when a co-worker who had been anticipating his retirement had to change his plans because the run away inflation left him with about 40% of what he expected to get.
Even these 401(k) plans that everyone is counting on…It’s a relatively new thing, in that not very many contributors have begun to take their stored up benefits. What will happen when these workers stop working and those funds are loosed on the economy?
Not only that, I have to question the author's arithmetic and use of statistics:
"Since 1871 in the U.S., all 40-year periods (there were 89)"
2001-1871=130
130 div 40 = 3 -- count 'em -- 3(!) statistically independent samples.
My guess is: not much. I expect those funds to be much dimished by then. But that's another thread.
Please read carefully paragraph 8 and especially Table 3 at this site.
These are rolling 40-year periods. There were, in fact, 89 of them during the period discussed since 1871.
-'Copernicus'
my user name on FR is rimini, but I, 'Copernicus,' am the author of this set of "Social Security and Stocks" articles. Thanks for your vital interest.
P.S. The expansions of the financial--and all--markets are without limit. What appear to be limitations and restrictions are transient episodes of contraction, soon followed by expansions. See Market Timing.
I'm aware that they are rolling. They are not, however, independent. There are at most 3(!) independent samples you can choose. Not a good basis on which to predict the next 40 years, IMO.
And the number 89 is arbitrary. The more willing you are to draw improper conclusions from dependent samples, the more periods you can have. Simply allow finer divisions of the start and end dates, i.e. choose start dates of "March 1, 1900", "March 2, 1900", etc. You could get thousands and thousands of samples from an hourly division of start end dates.
By doing this you can prove that in the past, that the timing of entry is irrelevant, provided your investment horizon is long enough. However the length of that horizon is a non-trivial fraction of the record, and prevents valid conclusions about the future.
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