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Monday, July 11, 2005

SSI and The Time Value of Money

 One of the joys of college teaching always obtained from my course, “Introduction to Computers”, where I taught freshmen how to develop spreadsheets using VisiCalc, then Lotus 1-2-3, and then Excel. I would tell them that they had a unique advantage, their youth, and show them the time value of money by developing a spreadsheet into which they could insert various investment amounts, interest rates and time periods.

I went back to one of those old spreadsheets the other day and found the following results. If you invest $1500 per year for 35 years (the average worklife) at 3% (the best return earned by present practices with Social Security), you end up with $93,414. If you invest at 7% (the average return on the US stock market for the past 100 years), you end up with $221,870. If you invest at 10% (the most prevalent average for various periods), you end up with $447,190. This assumes annual compounding, which is the worst case assumption you can make.

Here lies the heart of the argument in favor of putting some portion of Social Security taxes into tightly regulated individual or private accounts. Since I know that Social Security is going into the red sometime between 2018 and 2042 (depending on who is doing the forecasting and what assumptions are being made), I want something done now beyond just raising taxes, cutting benefits and/or raising the retirement age – some combination of which is necessary no matter what else we do. I want something done now for the sake of my children, my grandchildren and their children.

Those who say that this involves unacceptable risk simply do not know what they are talking about. If you take any 35 year period and average the stock market returns, the lowest figure you get is 3%, so the worst case of the stock market equals what Social Security earns now. There has to be another agenda at work here to discourage private accounts. Either that, or they have no confidence in the future of this country.

There is one valid argument against private accounts; it will require large amounts to be borrowed by the US government to finance the changeover, since tax receipts will not be enough to cover current expenditures, earlier than forecast. I liken this problem to the couple who continues to rent as they save enough to purchase a home without a mortgage. How foolish this is with rent payments going nowheres and housing prices rising by leaps and bounds. Russ

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