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Friday, June 13, 2008

"Imagine if Your Retirement Were Tied to the Dow Jones"

Those were the words uttered by Barack Obama today in talking about his plan to save social security. Obama proposed that incomes over $250,000 be taxed at the payroll tax rates of 6.2% along with the current taxes up to $102,000. Incomes in between $102,000 and $250,000 would remain untaxed.

Obama also criticized McCain for being open to letting taxpayers invest part of their Social Security payments in private investment accounts.

"Imagine if your security now was tied up with the Dow Jones," he said, alluding to the recent slide in stock prices. "You wouldn't feel very confident about the security of your nest egg."

Of course, this statement is wholly without merit and furthermore, it totally disregards the principle upon which private social security accounts would work, long term investing. First, private social security accounts wouldn't necessarily have to be put into a vehicle that is tied to the Dow Jones specifically, but whatever they were put into, they would be there for the long term, up to 40 years.

Let's put Obama's statement to the test. Let's take a look at what an investment tied to the Dow Jones would have done over the last thirty years.

That is a graph of the Dow Jones since 1900. About thirty years ago the Dow Jones was about 1000. It is now about 13000. . That means a $1000 dollar investment would now be worth $13,000. This is the sort of investment return that Barack Obama wants to make sure current young workers don't have access to in their Social Security accounts.

Keep in mind that Social Security returns about 2% yearly on its investment. That means over the same time frame, the current social security account would turn a $1000 investment into just less than $2000 over the same time period. Again, Barack Obama wants workers to be able to see this return over the one they would find in the Dow Jones.

I recently a piece in which I defended the concept of private social security accounts. It is amazing that such a concept could so easily be demonized even though it makes perfect sense. Private social security accounts are in no substantive way different from a 401k or an IRA, and yet the same politicians that demonize them so absolutely nothing about those two vehicles.

The stunning lack of understanding by Barack Obama about simple investment principles is only matched by those in the media that leave it unchallenged and the sheep that follow him even though his ideas run counter to basic logic.

1 comment:

Jack McHugh said...

Charles Murray ran the numbers for the entire history of the stock market a couple years ago, and came up with the worst result possible over a 45-year working life period:

"Let's say that we have a 21-year-old man before us who, for whatever reasons, will be unable to accumulate his own retirement fund. We accumulate it for him through a yearly contribution for 45 years until he retires at age 66. We can afford to contribute $2,000 a year and invest it in an index-based stock fund. What is the least he can expect to have when he retires? We are ridiculously conservative, so we first identify the worst compound average growth rate, using constant dollars, for any 45-year period in the history of the stock market (4.3% from 1887-1932). We then assume our 21-year-old will be the unluckiest investor in American history and get just a 4.0% average return. At the end of the 45-year period, he will have about $253,000, with which he could purchase an annuity worth about $20,500 a year.

"That's with just a $2,000 annual contribution, equivalent to the Social Security taxes the government gets for a person making only $16,129 a year. The government gets more than twice that amount from someone earning the median income, and more than five times that amount from the millions of people who pay the maximum FICA tax. Giving everyone access to a comfortable retirement income is easy for a country as rich as the U.S.--if we don't insist on doing it through the structure of the welfare state."

from WSJ,
"A Plan to Replace the Welfare State"
Sunday, March 26, 2006