Private Retirement vs. Social Security
The Cato Institute recently reposted a policy analysis on Facebook from February 2012. The analysis covers replacing employee contributions to Social Security with private investment and how much better individuals would fare in such a scenario. I won’t regurgitate Cato’s analysis and restate their claims, which can be found here. Instead, I am offering my own, much smaller, supplemental to the analysis.
A question was recently posed during a discussion of Cato’s findings of what would have happened if a person had retired in 2008, when the return of the Standard & Poor 500 index was -37%? It’s a fallacy to cherry pick only the worst return years, but I’ll accept it and broaden it to look at the worst periods of return in the last 100 years. What is also important to consider is the returns just following such terrible years. There is also an assumption here that only bullish positions on stocks were held by the prospective investor, which is but a tiny slice of how an individual investor can allocate funds. The S&P 500 is not the best representation of the overall performance of the some 11,000 or so American stocks available to most investors, but it is the most commonly accepted, and so it is being used here.
The worst annual performance of the S&P 500 was during the period from 1930 to 1932. If a person had been fully invested in the index for this period of time, he would have seen an overall decline in his investment funds of 59%. In the subsequent time period of the same length, the three years from 1933 to 1935, the same person would have had a gain of 223%, leaving him with 81% of his original investment funds. This is still a substantial loss in investment capital, but depending on how long the person continues in his retirement, his funds would continue their growth.
The second worst period for the S&P 500 was the period of two years of 1973 to 1974, where an investor would have lost 38% of his investment capital. During the subsequent same period of time from 1975 to 1976, the same investor would have gained 172%, which would leave him with not only recapturing all of his lost capital but also supplying him with a new gain of 6%. I recognize that this does not account for the use of a portion of these funds through retirement, but because we don’t know all of the investor’s particulars with how much he has and how much he spends, we can’t account for them.
So, now that we have seen the worst possible scenarios in the past 100 years, let’s take a look at the original question posed of what if a person would have retired in 2008, the worst single year in the past 100 years? While the investor would have seen a decline in invested assets of 38% in 2008, in 2009 there was a gain of 27%, and if someone were not to die right away but to continue with retirement, from 2009 to 2015, the returns would have been 264%, and the investor would have increased his capital by 166% of the original amount invested in 2008.
As was previously mentioned, stocks are not the only available investment, and purchasing stocks in a long position is not the only vehicle available to individual investors. One can profit from stocks going down, as well by selling stocks short. There are also bonds, precious metals, commodities, currencies, cryptocurrencies, real estate, business ventures, collectibles, personal and corporate debts, certificates of deposit, money markets, stocks available in foreign markets, etc. Individual investors have far more options for investments than do large institutional investors because of regulatory limits and because of the natural limits of their size.
None of this has even touched on the fact that the return on funds that were supposed to have been invested by the US government on behalf of US citizens for the purpose of supplemental retirement income are gone. Instead they were simply confiscated for use on the general budget and are not there at all. It is essentially the same as the US government providing an IOU to citizens on this retirement income. So, the return on it is zero. The current credit rating for the US government is AA+. The yield for a 10 year bond with the same credit rating is right now around 2.8%. Heck, the yield for a US 10 year bond is 1.78%. That isn’t much (and it’s actually a loss compared to inflation rates), but it’s better than zero.
It is both immoral and unfair that a government steals money that is supposed to have been set aside for retirees, and it is even more immoral and unfair that people are not allowed to invest their own money in whatever way best suits them for their own planned retirement. And, it is not only immoral and unfair, but it is also unwise. Individuals can fair far better on their own.