Unexpectedly Intriguing!
March 9, 2005

The Federal Reserve Bank of St. Louis has published a report by Thomas A. Garrett and Russell M. Rhine in the March/April edition of its Review (available as a 311KB PDF document) that provides a historical analysis that compares how Private Retirement Accounts would have fared next to Social Security in providing retirement income to people who retired in 2003, had the option been available during their working years. The authors found that:

From our numerical analysis, we find that over 99 percent of the U.S. population would have earned a greater return by investing in the S&P 500, and over 95 percent would have earned a greater return by investing in 6-month CDs relative to the current Social Security system.

Demonstrating that PRAs would be a better option for providing retirement income for 95 out of 100 workers. Even taking market volatility into account (the period considered included the most recent market downturn, as well as all other market downturns over the past 56 years, which coincides with the working years of a 2003 retiree), Garrett and Rhine found that:

Despite these market fluctuations, a long-term investment in the S&P 500 for a 2003 retiree would have yielded a greater monthly income than is provided under the current Social Security system.

When you consider that the hypothetical 2003 retiree in the report would have faced a stock market that had been significantly depressed by the combination of the bursting of the Internet-stock bubble in 2000 and the aftermath of the September 11, 2001 terrorist attacks occurring at the worst possible time in their careers, right before retirement, the authors' findings make the proposed PRA option for Social Security even more compelling. Hat Tip: Divison of Labour via the Economics Roundtable.

Interestingly, the Economics Roundtable also highlights a post from Nathan Newman's Laborblog, which trumpets the recent action of the AFL-CIO in successfully driving the retail brokerage house Edward Jones out of a pro-Social Security reform coalition. The AFL-CIO was able to achieve this result by leveraging the more than $400 billion it collectively controls through its various members' pension plans by threatening to withdraw all of its business from Edward Jones and advocating to its membership that they should end their personal business at the firm as well.

Would I be alone in wondering what kinds of investments the AFL-CIO pension plan managers are making with their members' lifelong contributions to provide for their income in retirement?

Update: Apparently not! Larry Kudlow answers my rhetorical question in his post Dirty Pool.

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