NCPA - National Center for Policy Analysis


November 16, 2005

Robert Shiller, professor of economics at Yale University, suggests that many workers will lose money if they open personal retirement accounts (PRAs), which are a key component of the president's Social Security reform approach.

Shiller measures how workers would fare under the president's approach using financial market returns from 1871 to 2004 to construct 91 overlapping 44-year time periods.

  • But instead of using the actual return on government bonds over these periods to determine the benefit offset rate, he uses a higher fixed real rate of 3 percent as the projected future government borrowing rate.
  • Under these assumptions, in one-third of these time periods, workers would have been worse off than if they had not invested at all, say economists Andrew J. Rettenmaier and Zijun Wang.

However, as Shiller notes, the 3 percent offset rate is too high, and he suggests using a market return. Using the actual, historical bond rate of return, Rettenmaier and Wang repeated the simulations. They found that:

  • Workers with balanced portfolios of stocks and bonds exceed the break-even point in all of the simulations.
  • Workers who invest in a lifecycle fund suggested by Shiller will experience a net gain (personal account balance minus a benefit offset) of $15,830 to $102,031, with a real internal rate of return ranging from 1.57 percent to 4.68 percent, depending on the simulation.
  • If a worker instead invests in a more aggressive lifecycle fund, the net gain is $50,533 in the worst scenario and $248,400 in the best scenario.
  • Based on the historical data, some workers' net gain would exceed the benefit offset amount by more than two-and-a-half times.

Source: Andrew J. Rettenmaier and Zijun Wang, "Social Security Reform: Responding to the Critics," National Center for Policy Analysis, Policy Report No. 281, November 16, 2005.

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