“FactCheck” Flunks Financial Economics
Via Andrew Samwick comes the latest from FactDistort.org who attack Senator Reid’s Social Security Calculator with this:
In fact, the calculator is rigged. We find it is based on a number of false assumptions and deceptive comparisons. For one thing, it assumes that stocks will yield average returns of only 3 percent per year above inflation. The historical average is close to 7 percent.
Even if the expected return to stocks is reasonably proxied by this historical return (I hear Brad DeLong will be presenting the Baker-DeLong-Krugman paper next week), why should we assume that rational individuals would wish to have their overall retirement portfolio risk rise in this way. We have noted repeatedly the Barro-Becker position that individuals would not wish to do so, which means Senator Reid’s 3% assumption likely overstates the return since bonds are paying only a real return of 2%. To be fair, Andrew has five particular challenges to Reid’s calculator including his fourth discussion, which goes directly to this issue.
Update: Jesse Taylor points out the rest of the stupidity in this FactCheck attack on Senator Reid’s calculator.