I just read a very interesting article on Wall Street Journal Personal Finance Section, titled “Save Your Nest Egg, Hold on to Stocks” written by Mr. Zweig. The article surrounds the idea that since your Social Security income stream can be turned into a present value number equivalent to a bond/annuity that it should count towards your asset mix.
It is easily explained via Mr. Zweig’s example (assuming a $1million portfolio with a 60/40 split of Stocks to Bonds):
Say you are a 65-year-old man; your life expectancy is 17 more years. You earned good money, and now you can expect a monthly Social Security payment of $2,000. At least for now, the U.S. government pledges that you will receive those payments, adjusted for inflation, for as long as you live. Having Social Security is equivalent to holding a bond that should produce $24,000 in today’s purchasing power every year.
This kind of bond has a name: an inflation-adjusted immediate annuity. How big an annuity would match that $2,000 in Social Security each month? With the help of Allan Roth, a financial planner at Wealth Logic LLC in Colorado Springs, Colo., I was able to answer this question. It takes a $327,000 lifetime annuity — assuming you bought it from Vanguard, an economical provider, at this week’s rates — to throw off $2,000 a month, after inflation, for the rest of your life.
Strictly speaking, this $327,000 implicit bond is on Uncle Sam’s balance sheet, not yours — but its income belongs to you. Effectively, that gives you a total bond position not of $400,000, but $727,000.
Social Security is not an Asset for your Balance Sheet
I love exercises like this and while the article is extremely thought provoking, I think Mr. Zweig’s is simply wrong (and probably misleading). Let us ignore the obvious contention that I, as a 27 year old, have little chance of seeing SS as we know it today. There area a few other reasons that I think Mr. Zweig’s analysis is incorrect.
First and foremost, his math is incorrect. Annuities, bonds (especially muni bonds), and social security income are all taxed differently; so without even getting into meat of his discussion, the underlying math, superficial example is wrong. Notwithstanding the math discussion of tax implications, the definition of SS is different than what Mr. Zweig is proposing. While Mr. Zweig looks at is as an entitlement program (in fact I bet most baby boomers have this view), it was actually created as protection program – protection when over 50% of elderly people were below the poverty level (got that stat from wikipedia!). Social Security is not an asset class – regardless of how you want to personally classify it.
Additionally, you are counting assets you do not own.
Effectively, that gives you a total bond position not of $400,000, but $727,000
There is literally nothing you can do if Social Security was shut down tomorrow – this sort of sounds like the accounting our boys at ENRON prided themselves in. I do not have a bond position of $727K – the bonds I own are valued at $400K. PERIOD. Simply put, this type of personal accounting could lead older Americans to increase their equity positions, since their “bond” position is higher. Does this seem sound at all?
To be honest, I am not sure why this article was written; if it was going to be a comprehensive study then it should have been more than 4 paragraphs; if it was meant to be an alternative asset allocation based on this theory – it should have been more than 4 paragraphs; and if it was meant to be a simple thought provoking piece, then it needed a disclaimer saying so.