Sep 18th, 2008 at 4:41 pm
Retiring, McCain-Style
Though he’s now coy, John McCain has pretty consistently supported privatizing Social Security at least since his 2000 presidential campaign. So Ben Furnas got the smart idea of making a graph showing what’s happened to the Dow since McCain unveiled his plan “to shore up Social Security through the establishment of individual investment accounts.”
Long story short, you lose eight percent in nominal terms.
47 Responses to “Retiring, McCain-Style”
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September 18th, 2008 at 4:31 pm
Speaking of finance:
News is out that Paulson is arranging a resurrection of the RTC, the gov’t agency that oversaw the S & L bailout.
When the CEO of Wells Fargo heard the news he said “I feel like a kid in a candy store”. Dow closed up over 400.
Tells you all you need to know about who’s going to benefit and who’s going to pay.
Sen. Schumer (D-WallStreet) was on TV “explaining” the latest rape of your children’s future.
September 18th, 2008 at 4:33 pm
Of course, having all of your retirement funds in stocks, especially near retirement, is unwise. A portfolio that includes several asset classes, rebalanced regularly and callibrated to get the right risk-return mix for your age, would still have done okay during this time period.
Okay, now raise your hand if you think most people you know would pick a wise portfolio mix with their private SS account!
September 18th, 2008 at 4:51 pm
I have a similar figure charting the DJIA through Clinton and Bush’s terms, showing that the DJIA today hit its price at Bush’s inauguration: http://alchemytoday.com/wp-content/uploads/2008/09/djia1993to20081.png
The low today was actually a bit below that, so I guess I jumped the gun. I suppose the answer is that privatizing Social Security works as long as we have a Democratic president — good luck unraveling the paradox in that one.
September 18th, 2008 at 4:55 pm
This doesn’t take dividends into account. I don’t think you know how investing works, Matthew.
September 18th, 2008 at 4:55 pm
And how much of your money do you get back from Social Security? The current generation of beneficiaries are making a healthy return, but future generations aren’t going to get back even the nominal amount they put in.
In the long-run, equities outperform other asset classes. If you look at just about any other historical period, stocks have done rather well. Poor returns in the last few years reflect the hangover from extraordinary returns during the 90s and the recent financial crisis. It’s reasonable to assume that stocks in the future will do very well. Of course, this is no consolation to people who only started investing eight years ago and need to withdraw now, but privitization advocates have always recommended equities primarily for young people, for whom they are an excellent choice.
But you also don’t need to invest your money in the Dow. A mix of bonds, international stocks, commodities, and small-cap stocks would have done much better in this period, definitely beating the guaranteed negative returns many of us can expect from Social Security.
September 18th, 2008 at 4:59 pm
If that’s a concern, nudge people into an optimal default choice like they do in Sweden, or have people choose among decently designed mutual funds as they do in Chile.
September 18th, 2008 at 5:03 pm
Wow Matt, this is the most brilliant fucking post you’ve ever had. I suppose if one’s investment horizon was 8 years, you might come close to approaching the faintest outlines of a point. In the real world, investing in the stock market over a 40-year span would easily outperform the return from Social Security. Moreover, your investment would not go poof when you die, like Social Security does.
September 18th, 2008 at 5:05 pm
What the government did today was essentially print a trillion dollars to try and straighten everything out. This will surely lead to inflation, worse than we already have. Those of us on fixed incomes are in for very, very rocky times. What the Bush administration is doing is trying to stave off a reckoning with the problem in order to help McCain win the election. This is just making the situation far, far worse. Yes, the banks collapsing will hurt…but less so than 1000%inflation.
September 18th, 2008 at 5:13 pm
Helluva cherry-pick Matt.
When a change in one week in your end date causes a doubling of your bottom-line number, that’s an indication that your reported result is flaky.
Try a long-term trend rather than the difference between two points out of about 2000.
Would I be out of line to call another innumeracy alert?
I’ll let someone else do the innumeracy alert for Brad.
September 18th, 2008 at 5:14 pm
Dividends are non-existent these days. Certainly not enough to make up for the real loss (e.g. adjusted for inflation). You would have made more money leaving your investment capital in a CD or a money market.
September 18th, 2008 at 5:23 pm
A mix of bonds, international stocks, commodities, and small-cap stocks would have done much better in this period, definitely beating the guaranteed negative returns many of us can expect from Social Security.
How would that do better, necessarily, than the fundamental idea of social security: pay current benefits proportional with increases in some price index by taxing today’s workers proportional to wages? The success of both systems are contingent on economic growth — the difference is that your plan would bring in an international component and introduce short term risks that social security handles with the trust fund.
September 18th, 2008 at 5:24 pm
Dividends are important.
-8% looks good to people my age who are forced to ‘invest’ in Social Security. I’ll be very lucky to make anywhere near break-even with Social Security.
September 18th, 2008 at 5:26 pm
Walker,
Dividends are non-existent for young, tech companies. For Dow Components, they’re not. Every Dow component but one has dividends. The average dividend yield of all components is 3.5% (which is greater than average inflation). Next time you say something, you should actually know what you’re talking about. Especially when you consider the fact that Matt cherry picked a peak and a trough.
I think this qualifies for an innumeracy alert.
http://www.indexarb.com/dividendYieldSorteddj.html
September 18th, 2008 at 5:29 pm
How would that do better, necessarily, than the fundamental idea of social security: pay current benefits proportional with increases in some price index by taxing today’s workers proportional to wages? The success of both systems are contingent on economic growth — the difference is that your plan would bring in an international component and introduce short term risks that social security handles with the trust fund.
Because of declining dependency ratios and a looming gap between SS’s assets and liabilities. Also, as Matt has pointed out, the returns from capital have increased relative to the returns to labor, which have been stagnant. A balanced portfolio can grow 8% a year; wages will not.
September 18th, 2008 at 5:39 pm
Would anyone here voluntarily pay MORE into Social Security because they think they’ll get a better return than in the private market?
September 18th, 2008 at 5:55 pm
1) Reinvestment of dividends ain’t gonna change much over this span
2) Pointing out that changing the dates by a week greatly changes the result doesn’t exactly put forward a pro-privatization argument for people looking for Social Security to be secure
3) The market was flat, in nominal terms, over the 25 year span from ‘68 to ‘83
Anyway, I’ve been investing over roughly the time span illustrated here, and perhaps the best description of the rate of return would be “not exactly dynamite.”
September 18th, 2008 at 5:57 pm
The long term trends are also cherry-picked.
Look at the market 1950-1982. Ignoring dividends, the period over 30 years gave a 50% nominal return, for a pathetic 1.4% annual yield on price. Factor in the massive inflation of the 70s and you were screwed.
Yes, there were dividends, but the return on those was not better than bonds or other investment vehicles. There is a reason why equities were shunned by investors in the 70s.
All the long term stock market nonsense I have ever seen uses analysis that starts in the 80s. Why should one 30 year span be better than another?
September 18th, 2008 at 5:57 pm
People so often just don’t get the whole idea of Social Security.
September 18th, 2008 at 6:13 pm
Eesh, this is pretty egregious. Nobody with 8 years to retirement would have a risky portfolio mix of 100% DJIA stocks. And even if it were true that someone retiring right now will have lost some money, the meaningful thing is to compare it against the performance of Social Security.
I’m not sure where I stand on there being some degree of Social Security privatization, but I notice that progressives tend to be pretty lousy on the issue intellectual-honesty wise. I’d like to hear a progressive outline what they think would be the most sound and pragmatic SS privatization scheme they can think of, and argue against that.
September 18th, 2008 at 6:15 pm
Brad said it better than I could, but I’ll give it a shot anyway:
Matt, do you think when John McCain was supporting Social Security privatization, you think he meant that all workers should get a one-time investment in the Dow Jones Industrial Average, with no additional investment or withdrawals, forgoing all dividends, and entirely cashing out on an arbitrary day eight and a half years later? If not, then your post makes no fucking sense.
September 18th, 2008 at 6:17 pm
Look –
Dow return is appreciation plus dividends. You can’t look at one and say it is bad, look at the other and say it isn’t great, and then say the whole thing is bad. You have to add them together, in which case they are pretty good generally unless you go out of your way to pick a peak to start from and a valley to end with. Right now we are obviously in a valley (although maybe not at the bottom of it yet). All that means is right now is a really good time to buy stock.
September 18th, 2008 at 6:23 pm
I would say that no, the meaningful thing is not to compare the Dow against the performance of Social Security, depending on just what you mean by this.
It does not make sense to simply compare your personal return on Social Security to returns on stocks, since SS is saddled with the obligation to pay current retirees. This will not go away even if current wage-earners are suddenly able to divert their SS taxes to their own accounts. This must be backed out to arrive at a return number comparable to returns on stocks, and this would make SS look much more favorable.
September 18th, 2008 at 6:31 pm
27, you’re playing a rhetorical game that you lose by definition.
The only institution in the business of collectively managing risk — and maintaining something of a level playing field — for all citizens is the U.S. Government. The only way any form of “privatization” of SocSec can be “less risky” and “definiately a better deal” is via MORE government management, not less. Which doesn’t seem to be what you suggest you want.
/ehj2
September 18th, 2008 at 6:37 pm
If you use the S&P 500 instead of the Dow (which makes a lot more sense), you get the following total return since Jan 11, 2001:
With Divdends: -5.5%
Without Dividends: -16.9%
So dividends definitely matter, but not enough to change the basic story. On the other hand, it’s true that Matt picked a peak to start on. A more realistic exercise would be to find the return on investing a steady amount each month over the period.
(This is according to the SPY exchange traded fund, which includes some modest management fees. Data from Yahoo finance.)
September 18th, 2008 at 6:39 pm
I have charted the DJIA since the beginning of the Bush Administration adjusted for the value of the dollar. See here. As of the close of the market last Friday, the adjusted DJIA had lost about 23% of its value since Bush took office.
September 18th, 2008 at 6:44 pm
Those whining about cherry picking are idiots. Do you think the date Matt picked was fucking arbitrary? The people who want your retirement dependent on the trust fund scumbags on Wall Street are the ones who came to power on Jan 20, 2001. That’s why that date matters.
Only a pack of fucking morons support privatization of Social Security.
September 18th, 2008 at 6:49 pm
Dan at comment 18 nails it — Social Security is not about maximizing investment, it’s about ensuring a minimum level of income for retirees. And all of that money gets poured back into GDP as immediate consumption, thus providing a stable bottom line even in adverse conditions. Millions of people consistently spending money makes the economy run. Millions of people with NO money fueling NO consumption fuels a depression. SocSec is cheap insurance, not just for individuals, but the collective economy itself.
And all of you Privatized SocSec Advocates miss the point being played out around you right now — the “smartest guys in the room” just lost their collective shirts while destroying some of the most prestigious financial institutions in the world, and the market itself, to survive, has demanded their nationalization.
/ehj2
September 18th, 2008 at 7:06 pm
Is anyone here advocating for privatization? I think we just want intellectual honesty in the debate. If privatization definitely was both less risky and a better deal, would you still oppose it?
September 18th, 2008 at 7:17 pm
18 and 27 have got it.
the reason why social security is not a good return on investment for well-off individuals is that it is a redistributive programme, both to our parents and grandparents generation and to poorer workers in our own generations.
September 18th, 2008 at 7:18 pm
28, Anon,
You’re playing a rhetorical game that you lose by definition.
The only institution in the business of collectively managing risk — and maintaining something of a level playing field — for all citizens is the U.S. Government. The only way any form of “privatization” of SocSec can be “less risky” and “definiately a better deal” is via MORE government management, not less. Which doesn’t seem to be what you suggest you want.
/ehj2
September 18th, 2008 at 7:29 pm
28, Anon,
Look, someone working for a private corporation, probably in the media, and working for a corporate financial institution which is in business to make profits for itself, has persuaded you that you would make more money with them rather than with your own government which doesn’t charge you for managing your money (nor do you have to worry about it going bankrupt in the middle of the night).
Who benefits if you believe a used car salesman, I mean a representative of Bear Stearns? Okay, not fair, a bank that actually still exists?
/ehj2
September 18th, 2008 at 8:58 pm
BAC Bank of America was recently put into the Dow Jones Industrials. This would bring down the Average more than usual.
September 18th, 2008 at 9:25 pm
There’s another reason why this is wrong. This assumes that you are buying into the stock market in a lump sum at the very beginning of the term, when a rational proposal would have you buying small amounts over time. Even if the market ends at the same level it started you can make quite a bit of money overall, depending on the market’s behavior in-between. Specifically, if it falls early then rises, you can make money, and if it rises early then falls, you’ll lose.
In this case, the investor would gain 4% over the time period. Bad, yes, but it isn’t an 8% loss.
September 18th, 2008 at 9:34 pm
Is anyone here advocating for privatization? I think we just want intellectual honesty in the debate.
If you’re not advocating privatization, then there is no debate, and yo0ur poitn about intellectual honesty (whatever the hell you mean by that) is moot.
If privatization definitely was both less risky and a better deal, would you still oppose it?
If pigs had wings . . .
When people point out to you, in some considerable detail that privatization cannot be less risky and a better deal for the country, you respond with such a question?
September 19th, 2008 at 3:43 am
1) To use the indexes over a long time period (>10 years) is misleading — because failed companies are taken off the indexes and new, growing ones are added.
2) Using the historical indexes is like looking at a high school class from 40 years ago, seeing which graduates have been highly successful and arguing that those few graduates are representive of the high school’s performance. While ignoring all the graduates who went on to become drunks, suicides, drug addicts , car wreck casualties, and homeless.
3) It is also misleading to suggest that “past performance is indicative of future results”. The US had unrivaled dominance of the world economic system after WWII –every other major power was devastated by war.
That advantage has eroded greatly in recent decades –the billions of people in Indian and China have enormously more scientists and engineers than we do. Plus our last three Republican Presidents have borrowed $8 Trillion — and pissed it away , with little or no investment.
4) Plus, of course, you have to adjust the indexes for inflation. Do that and the US stock market during the Bush Administration has been a utter disaster for investors.
September 19th, 2008 at 7:01 am
“Moreover, your investment would not go poof when you die, like Social Security does.”
No, they would go poof *before* you die.
Social security is like an insurance policy. You don’t buy insurance expecting to make money.
September 19th, 2008 at 8:14 am
Plus the indexes by definition are averages.
A LOT of stocks (roughly 50% ) perform worse than the index. You can’t have winners without a lot of losers — that’s why the Republicans are trying to rope a lot of Rubes over from Social Security into the stock exchanges.
The guys on Wall Street doing the three card monte games have noticed that their audience has gotten a lot more sceptical and isn’t putting up money to play — so they want their Republican Congressmen to send a caravan of buses into the countryside and bring in the hicks.
Some stocks do much worse than the indexes, as we’ve seen recently. That’s why future quotes of the Dow won’t include Lehman , Bear and probably not AIG. Just as current cites of the DOW ignore all those dogs that have been put to sleep in the past.
September 19th, 2008 at 8:35 am
Clearly we could get a much, much better rate of return on our Social Security investment if we would just be willing to bet it all straight up, maybe 23 red.
September 19th, 2008 at 10:40 am
Privatization advocates should also consider the potentially distorting effects of massive government involvement in the market. How long before Rick Wagoner is hitting up Congress demanding that Social Security “invest” in the too-big-to-let-die, why-does-the-free-market-hate-America GM? How long before SS becomes a tool for market distortion in favor of political goals, and risks its own solvency on the hopes of the politically-favored?
September 19th, 2008 at 11:10 am
I’ll vote for SS privatization if, and only if, the enabling legislation is correctly labeled: to wit, “The Financial Services Industry Guaranteed Re-capitalization, Full Employment and Profitability-in-Perpetuity Act of 2008′.
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If you have to do it, you might as well do it right
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