Tuesday, March 22, 2005
Another Social Security Strawman
This article by Donald Luskin on Social Security, Life-Cycle Accounts, and Robert J. Shiller on NRO Financial does a thorough job of debunking Shiller's recent "analysis" of of SS Life-Cycle accounts. It wouldn't be worth mentioning except that Shiller got a lot of press shilling by the Washington Post recently and the Anit-Choice crowd are running with it.
Contrary to the news hype, the Shiller paper is just a good example of how to build a strawman and then beat it down; although in this case, Shiller had to really work at finding straw frail enough to make his point. The Luskin article (click above) has many links to pertinent sources, including Shiller's full paper, to back up his points. So what did the paper say and what's wrong with it? According to Luskin :
"What the “paper” really said was that, in computer simulations of past investment performance, an investment strategy that Shiller invented out of whole cloth underperformed the returns of the existing Social Security system in 32 percent of the trials.
This leads Shiller, in overheated language not found in authentic research papers, to say in his “paper” that life-cycle accounts in Social Security “could be disastrous for some workers.”"
What are life cycle accounts and are they central to the Bush Plan? Well, they may be useful, but they are far from central to the Bush plan; as Luskin says :
"The White House has talked about life-cycle accounts in a general way, but it has never defined in detail how they would be designed. So Shiller’s “disastrous” simulated investment performance is for a strategy that he himself made up. And as you’ll see in a moment, he cheated.
The only thing the White House has said, in press briefings and in policy documents, is that a life-cycle account would shift “investment allocations from high growth funds to secure bonds as the individual nears retirement.” And the 2002 report of the President’s Commission to Strengthen Social Security talked about an investment option that would be 50 percent stocks and 50 percent bonds. Shiller knows all that — because he specifically cited all three sources.
Shiller says his simulated life-cycle portfolios were “designed to capture the President’s proposal.” Yet all of his simulations are based on hypothetical life-cycle accounts in which half the bond allocation is, in fact, arbitrarily devoted to money market assets. Historically, according to Ibbotson Associates, the real return for money market assets has been less than a third of the real return of Treasury bonds. Thanks to the power of compound interest, over many years that makes a huge — and “disastrous” — difference in returns.
Then, to make life cycle accounts look even more “disastrous,” Shiller uses historical returns that are far less than those actually achieved by the investments he is simulating. Instead of using returns from U.S. markets, he uses returns from an average of 15 countries."
The bottom line is that if you work real hard, you can build a weak strawman and knock it down. But why do so? Well, in his paper, Shiller does make a big point of thanking Jason Furman “for substantial assistance.” Furman was director of economic policy for the Kerry-Edwards campaign. Political bias on political issues is hardly a disqualifier; but it does add perspective to a weak position paper. As the old government saying goes " Where I stand depends on where I sit."
Contrary to the news hype, the Shiller paper is just a good example of how to build a strawman and then beat it down; although in this case, Shiller had to really work at finding straw frail enough to make his point. The Luskin article (click above) has many links to pertinent sources, including Shiller's full paper, to back up his points. So what did the paper say and what's wrong with it? According to Luskin :
"What the “paper” really said was that, in computer simulations of past investment performance, an investment strategy that Shiller invented out of whole cloth underperformed the returns of the existing Social Security system in 32 percent of the trials.
This leads Shiller, in overheated language not found in authentic research papers, to say in his “paper” that life-cycle accounts in Social Security “could be disastrous for some workers.”"
What are life cycle accounts and are they central to the Bush Plan? Well, they may be useful, but they are far from central to the Bush plan; as Luskin says :
"The White House has talked about life-cycle accounts in a general way, but it has never defined in detail how they would be designed. So Shiller’s “disastrous” simulated investment performance is for a strategy that he himself made up. And as you’ll see in a moment, he cheated.
The only thing the White House has said, in press briefings and in policy documents, is that a life-cycle account would shift “investment allocations from high growth funds to secure bonds as the individual nears retirement.” And the 2002 report of the President’s Commission to Strengthen Social Security talked about an investment option that would be 50 percent stocks and 50 percent bonds. Shiller knows all that — because he specifically cited all three sources.
Shiller says his simulated life-cycle portfolios were “designed to capture the President’s proposal.” Yet all of his simulations are based on hypothetical life-cycle accounts in which half the bond allocation is, in fact, arbitrarily devoted to money market assets. Historically, according to Ibbotson Associates, the real return for money market assets has been less than a third of the real return of Treasury bonds. Thanks to the power of compound interest, over many years that makes a huge — and “disastrous” — difference in returns.
Then, to make life cycle accounts look even more “disastrous,” Shiller uses historical returns that are far less than those actually achieved by the investments he is simulating. Instead of using returns from U.S. markets, he uses returns from an average of 15 countries."
The bottom line is that if you work real hard, you can build a weak strawman and knock it down. But why do so? Well, in his paper, Shiller does make a big point of thanking Jason Furman “for substantial assistance.” Furman was director of economic policy for the Kerry-Edwards campaign. Political bias on political issues is hardly a disqualifier; but it does add perspective to a weak position paper. As the old government saying goes " Where I stand depends on where I sit."
