Authors of studies
As always, I enjoyed your editorial, "Allocation confusion," in the March 20 issue of Pensions & Investments. The problem is that the only reason for the confusion is Roger Ibbotson. Only one of the three questions posed in the Ibbotson-Kaplan article makes any sense. Please see my May 17, 1999, Other Views commentary in P&I regarding this confusion.
Dale Stevens, Mark Wimer and I co-authored another version of the same studies, with the answer to the right question. Our articles have been published in the Winter 1999 issue of The Journal of Investing ("The Importance of Investment Policy") and the Summer 1999 issue of The Journal of Performance Measurement ("Investment Policy Explains All").
I am the originator of the studies, as the May 17 P&I commentary pointed out. I approached Ibbotson Associates and Wurts & Associates with the idea of doing the Brinson, Beebower study right. When the results were all in, and the emperor's clothes were revealed, Roger decided (for reasons I can only guess) to obfuscate the obvious, so we agreed to disagree. Hence the separate articles. The game plan at the outset was to co-author one Surz-Ibbotson-Stevens paper.
I think your readers should be un-confused.
Ronald J. Surz
Roxbury Capital Management
Santa Monica, Calif.
Social Security returns
Omitted from Kevin Lansing's April 3 Other Views commentary on Social Security's rate of return is the reduction in financial responsibilities to needy relatives. If this saving is considered, then Social Security's return to many workers will be far greater than 1% to 5%.
Consider a married couple, both age 30, contributing $4,000 a year to Social Security. They have up to four surviving parents who are or will soon be retired and receiving each year from Social Security about $13,000 separately or $20,000 as husband and wife. This enables the parents to live without calling on the young couple for financial assistance.
Over the next 35 years the couple will pay $140,000 in Social Security taxes. However, the benefits received by their parents spares the couple from having to contribute, say, $8,000 a year toward their support for perhaps 20 years, for a total of $160,000. They then will have a net gain and, in addition, when they reach age 65, become eligible to receive their own annual Social Security income of about $20,000.
What is the rate of return on the $140,000 the couple paid in taxes over 35 years? In my example, there is no cost to them, since they have saved $160,000 by not having to contribute $8,000 annually for 20 years. They will thus receive gratis their $20,000 per year at age 65, and the yield on this outright "gift" is infinity.
Further, the $160,000 saved may enable the couple's children to go to college and raise their economic status. And the economic status of their children's children may be raised as well. What we have is a chain of increasing productivity, which will benefit the country well into the distant future.
There are other returns to workers that further enhance the yield, such as the full annual cost-of-living adjustment and the taxes they would incur for government programs for the increased number of poor persons in the absence of Social Security. The traditional savings account analogy for calculating the return on Social Security thus needs to be broadened.
David Langer Co.