What’s Nuttier than a 7% Rate of Return Expecation?

Highly attuned, as I am, to local pension systems’ anticipated rates of return on investment, I can’t resist sharing this paragraph from a Kevin Williamson essay on Massachusetts Democrat candidate for the Senate seat currently occupied by Republican Scott Brown, appearing in the April 16 National Review (emphasis added):

[Warren’s] appeal is not limited to economic illiterates. Some time back, I wrote an essay for The New Criterion in which I argued that a typical American couple making a modest income would do far better in retirement if they invested most of the money that they would have paid in Social Security taxes, putting aside 10 percent of their income with an expectation of a 7 percent return. Among those who took the time to scoff was Susan Webber (writing under her pseudonym, “Yves Smith,” of the blog Naked Capitalism), a highly regarded analyst of the U.S. financial system and a trenchant critic of Wall Street. She argued that both of my assumptions were nuttier than pecan pie: Nobody is going to invest 10 percent, and nobody is going to make 7 percent back. As late as August of 2011, Webber was arguing that Warren should run for president of these United States — as a challenger to Barack Obama, Wall Street stooge and marionette of the 1 percent. If my assumptions were the financial equivalent of unicorns exflatulating distilled sunshine, I wonder what Webber makes of Warren’s model. For my sins, I have recently digested Warren’s schlocky self-help book All Your Worth, in which she suggests that families of modest means should be saving 20 percent of their income and expecting a 12 percent return, roughly doubling down on my optimism. Webber, quelle surprise, has not addressed that proposition. The appeal of us-and-them stories is powerful.

When it comes to public pensions in Rhode Island, that apparently laughable 7% would be among the most conservative assumptions.  As the pundit ping-pong of the article implies, and as American Principles Project economist Rich Danker recently suggested to me, choosing a rate of a return appears to be as much a political decision as a financial one, in the public context.



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