Alicia H. Munnell is very well-educated, and has an impressive resume. She’s the “Peter F. Drucker professor of management sciences” at Boston College, directs some kind of research center, and held very, very important economic positions in the Clinton administration.
And she says something here that’s either really stupid, or is entirely motivated by politics:
The 2009 Social Security Trustees report released Tuesday provides a basis for assessing how each held up. On the one hand, assets in 401(k) accounts — which are predominantly in stocks — have declined in value by about a third, employers are suspending matching contributions, and millions of unemployed workers have seen their retirement savings efforts disrupted.
“…declined in value by about a third…” Okay, that’s easy enough to believe. The question is: over what time period?
Over the past year? The past two years? Actually, if we can use the Dow Jones as a measure, stocks have lost about a quarter of their value in the last decade. So if you just started investing ten years ago, you’ve lost money.
Of course, any investment professional (and most amateurs) will tell you: investing is a long-term activity.
If you started investing 20 years ago, you’ve seen an increase of over 236% – 6.25% per year, compounded annually.
Thirty years ago: 904% – 8% a year, compounded annually.
Forty years ago: 760% – 5.5% a year, compounded annually.
You’ll notice a big difference between 30 and 40 years. There was a slight unpleasantness regarding the worldwide economy in there, I believe.
Even so: 5.5% is a damn sight better than Social Security offers. And if you die at 70, well, kiss that Social Security money goodbye (only partially if you have dependents, but completely if you don’t). An investment account is yours. You die early, it goes to your heirs.
More Munnell:
On the other hand, the Social Security Administration continues to send out monthly checks to 35 million retirees and their spouses, 9 million disabled workers and their families, and 6 million families whose breadwinner has died. In other words, the government system has proved to be much less fragile than the private system of retirement savings.
What utter…um…hogwash (my grandma might be reading). Now that Social Security is set to be broke in 2016 – seven years from now – exactly how long will it remain “much less fragile?”
That’s another nice thing about investment accounts. They don’t depend on acts of Congress.
At least, not yet.