Vtcodger says Soc Sec fuss is…

Lifted directly from comments cactus style:

Vtcodger says:

1. Social Security is adequate only if you plan to spend your golden years in a poorly heated hovel dining on macaroni and cheese. I’d be OK with that myself, but a lot of folks wouldn’t. Most people need additional savings. That’s where 401K, IRA, et al come in.

2. Some advocates of privatization are not motivated by ideology or greed. They perceive that there will be better long term returns from stocks than from treasury bills — which is basically where any investment component of SS is stashed. (more below).

3. Countries that have privatized retirement (Chile, the UK) may not be doing all that well with it. Transaction costs and administrative fees are said to be disturbingly high. It’s not clear that their plans won’t eventually require a massive government bail out.==

Equities (stocks) do indeed seem to have a better long term return than bonds. At least US stocks do. And that’s true even if you substantially discount current US equity prices which seem to be rather high and to be based on dubious earnings reports. I’ll skip the numbers because everyone’s numbers are different, but the difference does appear to be significant. A couple of percentage points. Which is a lot of money compounded over a lifetime of savings.

Two points:

T1. There was a discussion over at Brad DeLong’s blog a number of months ago about whether countries other than the US have a similar differential long term in stock and bond yields. The conclusions was — quite possibly not — at least not all of them. That is to say that “Equities have better long term yields than stocks” may not be a universal law. If it isn’t, then how do we know that privatized retirement won’t yield worse results than the current plan?

2. Although overall returns from stocks in the US have been excellent, there have been long dry spells. The assertion that there has been no decade where stocks haven’t made money is simply wrong — at least in inflation adjusted terms. My concern is whether a privatized retirement system could weather two decades like 1965-1985 where the real return on equities netted out to about zero.

This comment by Vtcodger