Why Real Rates of Return Must Fall

Earlier this month the Wall Street Journal published an article entitled “Private Accounts Can Save Social Security,” authored by Martin Feldstein, former chairman of President Reagan’s Council of Economic Advisors and a member of the Wall Street Journal’s board of contributors.

In this article, Feldstein made the following assertion: “With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit. That assumes a real rate of return of 5.5%, less than the historic average return on a balanced portfolio of stock and bond mutual funds.”

As explored in dozens of posts already, it is pretty easy to paint rosy scenarios when you assume a real rate of return of 5.5%. But “the historic average return” Mr. Feldstein alludes to presumably includes the last 40 years or so, a period during which total credit market debt in the U.S. has doubled five times, and now stands at over 350% of GDP.

In the post “National Debt and Rates of Return,” I tried to get a handle on just what all this debt is doing to our prospects for economic growth and healthy returns on investment. As documented in that article, America’s credit market debt, which includes all consumer, commercial, and government debt, totals over $50 trillion dollars. And the [...] Read More