Felix Salmon
has a proposalPfau makes a very basic calculation that for someone on a constant real wage, saving for 30 years and then living for another 30 years on 50% of their final salary, saving about 16% of your salary each year into a portfolio of 60% stocks and 40% bonds will put you into safe territory.
Of course, real wages aren’t constant over time, and all the other figures are highly variable too. But the bigger message certainly resonates with me: spend less effort on trying to boost your annual returns, when you have very little reason to believe in your alpha-generation abilities, and spend more effort on maximizing your savings every year.
Matthew Yglesias comments
"They Could Call It “Social Security”"I comment on Yglesias.
You ignored part of the quoted passage "a portfolio of 60% stocks and 40% bonds ". It wouldn't work so well if one invested only in bonds. Salmon's point is that people would be much better off buying and holding a diversified porfolio than trying to pick winners.
It would be like social security if the social security administration bought 60% stock 40% bonds not 100% treasuries. I think that would work out rather well frankly. Such an approach would elminate all future budget deficits in expected value. Of course the cost ist aht there would be surpluses in good times and deficits in recessions. We can't have that can we ? If the Federal government automatically ran a huge deficit during a recession,then we won't have recessions at all.
If there is a problem with this proposal, I haven't heard of it. It has been debated on the web for years.
Back to the quoted passage to explain more.
If an individual followed the rest of the proposal but bought only treasury securities, as the social security administration does, then that individual would be poor when old. This isn't like social security, because, constant population and wage growth, the SSA can pay proportional to the increase in total wages paid (due to both increased wages per worker and increased employment). This is a better return than the return on treasuries.
It also shows why a little issue like the baby boom creates such trouble. It is costly ex ante to the SSA, because for us boomers it has to build up a surplus and only gets the treasury rate on that surplus. Also the Republicans stole the money for tax cuts and wars but that's another issue.
