Editore"s Note
Tilting at Windmills

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March 19, 2005
By: Kevin Drum

PRIVATIZATION WOES....Yale economist Robert Shiller, an expert in investment cycles, has performed an extensive set of computer simulations to estimate likely future returns for Social Security private accounts invested in George Bush's proposed "life-cycle" portfolios. The results aren't pretty:

According to U.S. historical rates of return, the life-cycle portfolio fell short of the 3 percent threshold 32 percent of the time, meaning nearly a third of personal account holders would have been better off sticking with the traditional Social Security system. The median rate of return was 3.4 percent....

But he also adjusted for what he expects to be lower future rates of investment return by using historic rates of return from international stock and bond markets....The results were not encouraging: The life-cycle portfolio under these adjusted returns lost money compared with the traditional system 71 percent of the time, with a median rate of return of just 2.6 percent.

What's even more remarkable are the people who apparently agree with Shiller. The Post's Jonathan Weisman quotes both Jeremy Siegel, a stock market enthusiast, and Kevin Hassett of the conservative American Enterprise Institute in support of Shiller's views. All three agree that balanced investment portfolios are unlikely to earn 3% a year over the next few decades. The Heritage Foundation demurs as expected, but if a routine denunciation from Heritage is the best the privatizers can do, they're in big trouble.

Bottom line: any kind of prudent investment is likely to leave a lot of people worse off than they are under current Social Security law. As with any financial scheme, you should be mighty cautious about signing on the dotted line when you're dealing with a fast talking huckster who's seems a little too eager to sell his goods without giving you time to read the fine print. And who's a faster talking huckster than our very own George W. Bush?

Via Max. You can read Shiller's paper here.

Kevin Drum 1:07 PM Permalink | Trackbacks

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