Saturday, April 16, 2005

Heritage Foundation Doesn't Understand the Stock Market

The Heritage foundation released yet another Social Security calculator, this one supposedly based on "extensive demographic information and econometric modeling".

As with most of the other calculators out there, this one spits out a single number for an estimated benefit you "could" receive. Yes, you "could" receive that benefit, if your stock market account happens to have the exact rate of return presumed by the Heritage Foundation. But this model has two basic flaws. First, it says absolutely nothing about risk. It doesn't say, you could get a benefit of X, or if you're lucky, 2X, or if you're not so lucky, 1/2 X. It says, you can get a return of X.

And not only that, but X is based on the presumption that the stock market in the next 50 years is going to look like a repeat of the stock market during the past 50 years. As analysts always say, "past performance is not a guarantee of future returns". Economists in general project future returns are likely to be somewhat lower than recent historical returns.

Down in the Heritage Fondation's small print we read:


This calculator is an educational tool designed to help citizens better understand Social Security. It is not intended for use as a retirement planning tool. The data, assumptions, and formulas used in this calculator are based on the best information currently available to The Heritage Foundation.

So, the Heritage Foundation says their model isn't good enough for you to plan your future on, but it is good enough that you should gamble with the most predictable part of you retirement security.

Here, fishy fish fish!


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