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02/23/2005 Archived Entry: ""

Michael Crane, Editor of The Political Junkie Handbook, is circulating the attached email on Bush's Social Security Privatization Proposal.

Email: The Democrats' social security calculator, for example, gives the user a general idea of how they would fare under Bush's plan. Unfortunately, there is lttle information about the calculator. What factors did they consider? Benefits under the Bush plan are a function of time, return on investment and age of retirement. None of their assumptions are listed. I believe that they chose a very low ROI, probably around 2%, to arrive at their conclusion that retirees will find that their benefits will be cut under privatization.

I tested two rates of return on investment: 4.23% (average annual return over last 10 yrs. in an international stock index fund) and 6.95% ( average annual return over last 10 yrs in money market index funds) . I compared returns from the perspective of current age (50, 40, 30 and 20 years of age) and income ($30,000, $60,000 and $90,000).

The results indicated that some people gain and others lose at a 4.23% return and everyone enjoys substantial gains with a 6.95% return. I estimated that everyone will break even or enjoy small and moderate gains from the existing Social Security benefits schedule with approximately a 5% return. This should not be too difficult to achieve since the S&P 500 annually returned over 10% in each decade during the last 70 years.

Naturally not every group experienced the same returns. Generally, the young and affluent experienced comparatively greater returns. A full-color version of the resulting chart can be found here.

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