Friday, March 18, 2005

Shiller questions private account returns

Today's Washington Post has an article about a paper to be published by Robert Shiller that suggests about one-third of participants, or perhaps as many as 71% of participants, would not expect to match current Social Security benefit payments if they use the appropriate recommended life cycle accounts.

The article quotes Jeremy Siegel:

I'm one of these people who maintain the 3 percent rate is too high a trade-off," said Jeremy J. Siegel, a finance professor at the University of Pennsylvania's Wharton School and a longtime advocate of stock investing. "You can't get 3 percent in the market anymore."

And also quotes an American Enterprise Institute privatization advocate:

But Hassett, another supporter of private accounts, called the paper "a very thorough and interesting piece." The White House's response should not be to dismiss the paper's conclusions but to rethink the life-cycle portfolios or lower the 3 percent threshold, Hassett said. The latter is an action administration economists are already considering, he added.

But this begs an analysis of why a "3 percent threshold" is needed in the first place. The "clawback" is necessary because the money to finance these accounts has to be borrowed .

This is the same 3 real interest rate that is used to show the infinite horizon liabilities of Social Security increasing by $600 Billion a year that privatization advocates have been touting this week.

Maybe we can legislate the real interest rate to be something lower than three percent. But I doubt you'd get Alan Greenspan to advocate for the legislature controlling US treasury debt interest rates. If we let the market set the appropriate interest rate, and decide to finance $6.5 Trillion, or whatever it is for the privatization flavor of this week, required for transition costs, presumably, a study by someone as qualified as Shiller would conclude that there is a chance the real interest rate really will turn out to be 3% or perhaps even higher.

So, we're back to the basic question. Is it really a great idea for the US government to leverage up on treasury debt and gamble that the stock market will outperform US treasuries consistently over the next 50 years?

Is it really in the nation's best interest to try to borrow our way out of a savings deficit?


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