Actuarial Scoring Errors
By Arnold Kling
In this essay, I take off on “actuarial scoring” of Social Security plans.
In fact, at a 3 percent real interest rate, it would be irrational for me to switch to using personal accounts! I have some of my portfolio invested in Treasury-indexed securities, earning 2 percent. If instead I can earn 3 percent by sticking with Social Security instead of using a personal account, then I would definitely do that. If I cannot earn a 3 percent risk-free real interest rate anywhere else, and I have to pay a penalty of 3 percent for shifting into personal accounts, I would definitely stick with Social Security!
…On reflection, the amount of damage done by the Social Security actuaries is truly remarkable. Thanks to the actuaries, we have unrealistically optimistic estimates of Social Securities financial condition. We have unrealistically optimistic estimates of the returns on the stock market relative to economic growth. And, finally, we have an unreasonably high interest rate charged to people who switch to personal accounts, making it irrational for most individuals to take advantage of a personal account option were it to be offered.
UPDATE: See Victor’s excellent analysis at Dead Parrots
For Discussion. Is it fair to complain that a three percent risk-free real interest rate is too high?