Lousy Returns on American Retirement Assets
Having Social Security assets in treasury bills makes no sense at all. Assuming a working lifetime from 25 to 65, the assets in the fund do not need to be accessed for 20 years on average. And the retiree will be in withdrawal mode for perhaps another 15 years as the unused money sits in that same fund. That is some of the most patient money around. Basic finance theory suggests that investors can optimize their returns for any given level of risk, with higher risk tolerance comes higher expected returns. Risk is defined as volatility, illiquidity, and unpredictable final outcomes. Yet in finance terms, there is no "risk premium" paid to these investors who are forced to have their money sit in the "trust fund" for 20 years or more on average. While the interim volatility of other assets will be much higher than that of t-bills, over a 20-year period, the expected return of higher-yielding investments will fall in a very tight range.Investors could expect up to 2 to 4 percentage points of increased returns annually. At 3 percent real returns, an account will roughly double over 25 years. At 5 percent real returns, it will be almost 70% greater again. At 7 percent, it will be well over 5 times the original amount. So for the least wealthy retirees that rely on Social Security for a great portion of retirement income, this could be a massive improvement in their standard of living.
Treasury rates would go up due to the reduced demand for these instruments, but not by so much, because everybody loves a risk-free asset (especially international investors). Investors that really need a safe haven for their money would get paid more. The return on corporate securities would go down, making risk-capital that much cheaper. There are a lot of winners in this scenario. Of course, the U.S. government would have a great incentive to balance the budget, also a good thing, and perhaps promoting greater efficiency in this body that consumes 20%+ of GDP.
posted by Chris @ 1:16 AM
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