From: Richard Arsinow <richard.arsinow@rauland.com>
Subject: RE: More on risk
>>>>If history is any guide, individual accounts, even if invested in the same assets, will generate highly variable pensions for cohorts only a few years different in age. Dr. Gary Burtless, my colleague at Brookings, has calculated the variation in replacement rates (pension as a percent of earnings) that different cohorts of male workers would have received had they contributed 6 percent of their earnings to a total stock market index fund from the time they were age 20 until they reached age 62. He assumed that these accounts would not bear any administrative costs or pay taxes, that all the earnings would be reinvested, and that at age 62 the account balances could be converted without cost into annuities at prevailing interest rates. Under these assumptions, the replacement rate for those turning 62 in 1969-70 would have been close to 100 percent; for those turning 62 in the mid 1970s only 40 percent. Variations of this magnitude would be neither desirable nor politically sustainable. While this is an admittedly extreme example, it illustrates the nature of the risk inherent in a system of individual accounts.>>>>
So...The cohorts who retired at age 62 in 1969-70 would have had a replacement rate close to 100%, while those who maintained their investment entirely in stock up until retirement at age 62 in the mid-70s would have had a replacement rate of 40%. Had they reallocated even partially away from stock into bonds before the market went sour they would have done better, right?
Social Security intends to provide a replacement rate of 42% at normal retirement age, or 33.6% at age 62, for the average worker. [Source: SSA Pub 05-10006, March 1998 at http://www.ssa.gov/pubs/10006.html ]
Thank you, Mr. Reischauer, for providing this example to illustrate the superiority of individual investment accounts over Social Security, in terms of return potential.
