The Three Percent Solution

The basic problem is that you can't set this rate ahead of time, just like we can't set the inflation rate, the unemployment rate, or the rate of growth of the economy by legislative fiat.

The rate charged really should reflect the cost of the money, as set by the market. But that would create even more risk than picking a fixed rate, because the market might set a rate even higher than 3%, at least on occaision (such as over the past 20 years, when real treasury bond yields have exceeded 3%).

The problem goes away for solutions that don't rely on a leveraged gamble to try to get something for nothing.

For once we agree.

I read thru the Post article as well as Arnold's. Basically here is what I take to be a summary of his position:

Assuming a 3% real rate of 'risk free' return is problematic because:

1. 2% returns are more probable.
2. A 3% return is deceptive because it makes Social Securities deficits look smaller in terms of present value
3. A 3% return, when 2% is a better figure, gives 'private accounts' a higher bar to beat than is necessary to honestly be a better deal.

My thoughts:

1. If the true risk-free rate of return is 1% less than what is being predicted, then why wouldn't the 'average' return on stocks and bonds also be less?

2. Has Bush specified if the 'clawback' works off actual rates or a pre-set rate of 3%? If it is pre-set at 3% then private accounts are indeed a worse deal.

3. Aren't we just rehashing the old Equity Premium argument all over again? For retirees to 'get a better deal' the Equity Premium has to remain in force even though there's no viable economic theory to support it and it goes against theory that says markets are efficient.