ROI

ROI Return on Investment In 40 Years, Trump increased his net worth 300 fold, from $40 million to $12 billion 60 fold after inflation For those snowflakes whose pubic education prevents them from completing the math, Trump outperformed: Gold by 5.5 FOLD 401k by INFINITY S&P by 11 FOLD DJIA by 27 FOLD NYSE by 17 FOLD “social security” by INFINITY.       Gold Price Increased From $34 Under Nixon to $1,834 Under Obama, a 54 Fold Increase, or 11 Fold After Inflation     401k Are Now Increasing at less than 1% Per Y ear       S&P Increased 26 Fold, 5.3 Fold After Inflation       DJIA increased 11.1 Fold, 2.2 Fold After Inflation       NYSE Increased 17.4 Fold, 3.5 After Inflation           $1 MILLION in the Bank, vs. $450,000 in Social Security The average American male who would now have $1 million in the bank if the money which was deducted from his income for Social Security, had instead been in the bank for the last 40 years, will get back only $450,000 an ROI of a negative 55%.   Social Security’s Rate of Return January 15, 1998 44 min read Download Report William Beach Senior Associate Fellow As Director of The Heritage Foundation’s Center for Data Analysis, William W…. Copied Select a Section 1/0 Toggle open close What can Americans expect in future Social Security retirement benefits? A Heritage Foundation study reveals that the Social Security system’s rate of return for most Americans will be vastly inferior to what they could expect from placing their payroll taxes in even the most conservative private investments. For the low-income African-American male age 38 or younger, the news is particularly grim: He is likely to pay more into the Social Security system than he can ever expect to receive in benefits after inflation and taxes. Staying in the current system will likely cost him up to $160,000 in lifetime income in 1997 dollars. If Americans were allowed to direct their payroll taxes into safe investment accounts similar to 401(k) plans, or even super-safe U.S. Treasury bills, they would accumulate far more money in savings for their retirement years than they are ever likely to receive from Social Security. For example:

Social Security pays a very low rate of return for two-income households with children. Social Security’s inflation-adjusted rate of return is only 1.23 percent for an average household of two 30-year-old earners with children in which each parent made just under $26,000 in 1996.1 Such couples will pay a total of about $320,000 in Social Security taxes over their lifetime (including employer payments) and can expect to receive benefits of about $450,000 (in 1997 dollars, before applicable taxes) after retiring at age 67, the retirement age when they are eligible for full Social Security Old-Age benefits.2 Had they placed that same amount of lifetime employee and employer tax contributions into conservative tax-deferred IRA-type investments-such as a mutual fund composed of 50 percent U.S. government Treasury bills and 50 percent equities-they could expect a real rate of return of over 5 percent per year prior to the payment of taxes after retirement. In this latter case, the total amount of income accumulated by retirement would equal approximately $975,000 (in 1997 dollars, before applicable taxes).

The rate of return for some ethnic minorities is negative. Low-income, single African-American males born after 1959 face a negative real rate of return from Social Security. For every dollar he has paid into Social Security, a low-income, single African-American male in his mid-20s who earned about 50 percent of the average wage, or $12,862, in 1996 can expect to get back less than 88 cents. This negative rate of return translates into lifetime cash losses of $13,377 (in 1997 dollars) on the taxes paid by the employer and employee. Key Assumptions and Methodology

	“Rate of Return” is a statistic commonly used to measure the income performance of an investment. It represents the annual rate of increase in the value of an investment and is usually expressed in percentage terms.
	All calculations are adjusted for inflation.
	Both the employee’s and employer’s share of payroll taxes are included in the calculations.
	Unless otherwise noted, after-tax Social Security benefits and private investment returns are used for comparisons. That is, applicable income taxes have been subtracted from Social Security retirement benefits (in the few cases where those benefits are taxable) and from the retirement incomes derived from private retirement savings.
	The estimated insurance cost of pre-retirement survivors benefits is subtracted from Old-Age and Survivors Insurance (OASI) payroll taxes. Thus, only retirement income taxes and benefits are compared.
	Future increases in life expectancy and wages are taken into account and, unless otherwise stated, are consistent with the intermediate assumptions of the Board of Trustees of the OASI trust fund.
	Unless otherwise indicated, the “private” investment alternatives described in this study are based on tax-deferred IRA-type accounts, but with initial contributions not tax-deductible.

African-American females typically live longer than their male counterparts, yet even they have a rate of return lower than the general population. An African-American single mother 21 years old who in 1996 made just under $19,000 (the average for African-American females) can look forward to a real rate of return on her Social Security taxes of only 1.2 percent. Under conservative assumptions, if she had saved those same tax dollars in a private investment account composed of government bonds, she would have received a real return of around 3 percent per year. With a mixed portfolio of bonds and equities, she could expect a return on her investments of at least 4.35 percent. This means that even with a low risk/low yield portfolio composed entirely of Treasury bills, this single mother could have generated at least $93,000 more in retirement income (in after-tax 1997 dollars) than she would enjoy under Social Security.³

The rate of return has a damaging impact on communities. The cumulative effects of Social Security’s dismal rates of return can be appreciated by considering a hypothetical community. Suppose there existed a city entirely of 50,000 young, married double-earner couples in their thirties, with each person earning the average wage, and each couple had two children. The cumulative amount such a community could save in a private pension plan by retirement with the same dollars they currently pay in Social Security taxes is over $26 billion greater than these couples will get in Social Security benefits. This amount is roughly equal to the amount the federal government currently spends on food stamps each year for the whole nation, and nearly as much as direct federal spending on education.4

WHY RATES OF RETURN MATTER

The defenders of Social Security argue that rates of return are irrelevant to the Old-Age and Survivors Insurance (OASI) portions of the program. Social Security, they suggest, was intended to provide a basic but decent retirement income to beneficiaries and stop-gap incomes for surviving spouses. Future Social Security beneficiaries, they argue, should be saving now for additional retirement income to supplement benefits from the Old-Age and Survivors Insurance. Thus, they argue that comparing rates of return on private pension investments with those from a public program intended to pay out during retirement at least 35 percent of the wages an average worker earned prior to retirement is like comparing apples with oranges.⁵ How a Small Difference in Returns Means Big Differences in Cash The power of compound interest over a career can translate even small differences in the rate of return into large swings in lifetime savings. For example, the expected annualized real rate of return for Social Security is 1.2 percent for an average-income, 21-year-old African-American single mother of two who throughout her lifetime makes about 100 percent of the average earnings for African-American female workers ($18,650 in 1996).* Had she been allowed to invest her payroll taxes in highly conservative investments, she could expect to make a 3 percent real rate of return on a portfolio consisting entirely of Treasury bills, or a 4.35 percent real rate on a portfolio of 50 percent Treasury bills and 50 percent equities. Investing her taxes entirely in Treasury bills would give her an annualized rate of return that is almost two percentage points higher than she could expect from Social Security, and allow her to earn-during her lifetime-$93,330 more in terms of inflation-adjusted, after-tax 1997 retirement income than she can expect to receive in Social Security benefits. Investing in the mixed equity/bond portfolio would yield a rate of return 3.14 percentage points greater than she could receive from Social Security and would allow her to accumulate by retirement a lump sum that, in after-tax 1997 dollars, is $192,073 more than her lifetime projected value of Social Security benefits. * The Social Security Administration’s “Average Wage Index” as defined in the 1997 Annual Report of the Federal Old-Age and Survivors and Disability Trust Funds, Table III.B1, p. 178. A ratio of 72.5 percent of average earnings is assumed for the African-American single mother, which was the proportion of average earnings made by African-American females at the end of 1996 as reported in U.S. Department of Labor, “Usual Weekly Earnings of Wage and Salary Workers, Fourth Quarter, 1996,” January 24, 1997, Table 1. This line of reasoning contains a fundamental flaw. If Social Security taxes were low enough to allow workers to save these additional dollars for their retirement, apologists for the system might conceivably be correct in characterizing Social Security as a pension program of last resort. But Social Security taxes are not low, and they are crowding out the ability of most low- and middle-income Americans to save for retirement. Thus, the rate of return on these taxes is very important, especially for those Americans for whom Social Security is their main retirement savings. Crowding Out Savings As payroll taxes have risen, many more Americans have few dollars left over for supplemental retirement investment. Over the past 25 years, Congress and the President have increased Old-Age and Survivors benefits so often and so much that today the high payroll taxes needed to pay those current benefits crowd out private retirement investments.⁶ In 1972, the average worker (with his or her employer) paid 8.1 percent in Old-Age and Survivors payroll taxes on the first $9,000 of wages and salary (equivalent to about $21,500 in 1997 dollars);⁷ in 1997, that worker paid 10.⁷ percent on the first $65,400 of “earned” income (or the first $27,340 in 1972 dollars).⁸ Moreover, between 2020 and 2046, the Old-Age and Survivors tax rate will have to rise to 14.4 percent from today’s 10.7 percent if benefit costs are not cut.⁹ Because of rising payroll taxes for retirement, increasing numbers of poor and middle-income workers do not have the after-tax funds needed to create private supplemental pension investments.¹⁰ In fact, Social Security taxes now consume as much of the average family’s budget as do outlays for housing, and nearly three times more than annual health care expenses.¹¹ Because of the long-term financial problems of the Social Security trust fund, calculations of the rate of return for Social Security are likely to prove optimistic. The fact is that Social Security will not be able to pay out old-age benefits to the “Baby Boom” generation without additional tax increases on workers or benefit cuts. These tax increases or benefit cuts will further reduce the Social Security rates of return for those workers currently in their twenties, members of the so-called Generation X, and their children. As Social Security’s rates of return fall, the relevance of rates of return on private pensions rises. That is, members of Generation X are not simply going to ignore the decaying prospects for adequate income during their retirement years. Rather, they will insist increasingly on more opportunities for creating pensions to supplement Social Security’s Old-Age benefits. Thus, comparing rates of return for private and public pensions will become even more important to each new generation. In addition, the rate of return is important because the crowding-out effects of high Social Security taxes on private savings for low- and middle-income workers affect the wealth that can be left to the next generation. Few aspects of Social Security are as unintended or as damaging to low- and middle-income workers as the squeeze that high payroll taxes put on the formation of intergenerational wealth transfers. The inability of poor workers to accumulate enough savings to leave a nest egg to their children can mean that their children will be as dependent as their parents could be on their monthly Social Security check. It means that poor communities will not have as much “home grown” capital with which to create new jobs and sources of income. Without these new jobs and income, members of the next generation will be less able to save for retirement than they could be. Thus, by taxing away one generation’s opportunity to help the next generation start earning at a higher level, the Social Security system acts as a drag on future generations. Cumulative Effect on Communities Although a low rate of return on rising Social Security taxes reduces the potential retirement savings of individual households, it is important to appreciate the cumulative effect this has on communities. In both rich and poor communities, less money accumulated in each household for retirement years means less money in the community not just for living expenses, but also for new businesses, for sending children to college, and generally for giving the next generation a more secure financial foundation. In short, each succeeding generation in a community is weakened financially by a poor rate of return from Social Security. For a very rough picture of the cumulative impact on a community, consider a hypothetical small community of 200,000 residents. In this imaginary community, there are 50,000 families of four; all the parents are age 30; and both parents work, earning the average wage of $26,000 (in 1997 dollars). Assume that nobody migrates into or out of this neighborhood. In this greatly simplified hypothetical community, the difference between the lifetime amount of savings the parents would accumulate by placing their Social Security tax dollars in conservative portfolios and the amount actually obtained from Social Security would be approximately $26 billion in 1997 dollars (based on family cases analyzed later in this study). This is the savings they must forego due to the failing Social Security tax system and, in effect, is money drained from their community during their working years. To be sure, this example is completely fictitious, and actual calculations for real communities would vary widely. But this example serves to illustrate that the deficiencies of Social Security for individual households imply a significant impact on the long-run financial health of American communities.

SOCIAL SECURITY’S RATES OF RETURN FOR HOUSEHOLDS

The authors calculated Social Security’s inflation-adjusted (or “real”) rates of return for various segments of the population and compared these returns with the rates of return workers could receive if they were allowed to invest their Social Security taxes in safe, private retirement investments.¹² These calculations show that families at all income levels receive dismal returns for the lifetime taxes they pay. Defenders of Social Security often argue that Old-Age and Survivors benefits help low-income workers especially. But do they? Does Social Security give low-income Americans a decent return on all of the taxes they pay into the system over their lifetime of work?¹³ As Chart 1 indicates, a low-income family will likely receive at best a mediocre and at worst a very poor real rate of return from Social Security, despite the fact that Social Security’s formulae are designed expressly to redistribute income toward workers with low income. Single-earner low-income couples born before 1935, who have paid much lower lifetime payroll taxes, fare better than do much younger workers. However, even the best-case rate of return (5.37 percent for a single-earner couple with children in which the worker was born in 1932) lies below 7 percent, a conservative estimate of what economists estimate to be the long-range real rate of return on equities.¹⁴ Every other low-income group lies below this rate of return, or well below the rates of return available to Americans who have opportunities to invest in stocks and bonds for the long term. Double-earner low-income families, as well as single low-income males and females, fare badly under Social Security. Low-income single males are hit particularly hard because of the lower male life expectancy and absence of spousal and survivor’s benefits. The expected real rate of return from Social Security for low-income males falls from a high of 3.6 percent for those born in 1932 to 1.0 percent for those born in 1976-well below what could be realized from a prudent private investment portfolio. Chart 2 shows rates of return for average-income families.¹⁵ All of the groups fare badly under Social Security relative to the return that they could receive from a conservative private investment portfolio. A married couple with two children and a single earner fare best, receiving 4.74 percent if the earner was born in 1932. This expected rate of return falls gradually to less than 2.6 percent for those born in 1976. As in the low-income scenario, single males fare worst of all. An average-earning single male born after 1966 can expect to receive an annualized real rate of return of less than 0.5 percent (less than one-half of 1 percent) on lifetime payroll taxes. Chart 2 shows rates of return for average-income families.¹⁵ All of the groups fare badly under Social Security relative to the return that they could receive from a conservative private investment portfolio. A married couple with two children and a single earner fare best, receiving 4.74 percent if the earner was born in 1932. This expected rate of return falls gradually to less than 2.6 percent for those born in 1976. As in the low-income scenario, single males fare worst of all. An average-earning single male born after 1966 can expect to receive an annualized real rate of return of less than 0.5 percent (less than one-half of 1 percent) on lifetime payroll taxes. Table 1 shows selected Social Security rates of return for the general population, for African-Americans, and for Hispanic-Americans. Table 1 shows selected Social Security rates of return for the general population, for African-Americans, and for Hispanic-Americans.

WHAT DO THESE RATES OF RETURN MEAN IN DOLLAR TERMS?

Due to the power of compound interest, even what appears to be a relatively small difference in the real rate of return can have significant implications for a family’s lifetime accumulated wealth. In order to analyze the dollar implications of Social Security’s lower rate of return, the authors calculated the inflation-adjusted differences between Social Security’s benefits and what a fairly conservative investor could accumulate by retirement from a portfolio split equally between long-term U.S. Treasury bills and broad market equity funds. A low-income single-earner couple with children whose wage earner is 41 years old in 1997 can expect to receive about $202,000 in Social Security benefits in return for a lifetime of payroll taxes. Those 31 and 21 years old in 1997 can expect to receive around $215,400 and $240,200, respectively, in benefits. However, by investing these same tax dollars in a portfolio made up of 50 percent U.S. Treasury bills and 50 percent blue-chip equities, these three wage earners could accumulate by retirement an estimated $230,200, $241,000, and $249,000 in 1997 dollars, respectively.¹⁶ Hence, staying in the Social Security program means that low-income married couples will bear a cost of about $28,200, $25,600, and $8,800 for wage earners who were born in 1956, 1966, and 1976, even though this group has the highest rate of return from Social Security. Indeed, these amounts are likely to underestimate the gain from a private retirement plan, since they do not include any of the interest a couple can expect to earn on the accumulated sum in the period after retirement. Social Security poses even greater costs for groups with lower rates of return than low-income single-earner couples. A single male earning what the Social Security Trustees call “an average income” (or $25,723 in 1996) is particularly hard-hit by Social Security’s low returns. A 21-year-old single male making an average income throughout his lifetime can expect to lose $309,400 in potential retirement income by staying in Social Security when compared with what he would earn if he invested his payroll taxes in a safe, conservative private retirement fund made up of 50 percent equities and 50 percent government bonds. A 31-year-old single male who earns what the Social Security Trustees call an average income will lose $311,000 over the income a conservative private portfolio would likely yield, while a similar 41-year-old will forego $296,000 (in 1997 dollars).

SOCIAL SECURITY AND AFRICAN-AMERICANS

Due to generally lower life expectancies, African-Americans experience particularly poor rates of return from Social Security. This means, among other things, that Social Security taxes impede the intergenerational accumulation of capital among African-Americans, a group which has found it difficult to acquire capital. In fact, even under the most optimistic assumptions, Social Security taxes actually shrink the lifetime net earnings of some of the least advantaged members of the community. Despite efforts to transfer resources toward low-income individuals through Social Security, low-income African-American males realize particularly dismal rates of return from Social Security, even under the most favorable assumptions. Chart 5 shows the real rate of return from Social Security for African-American males who earn what the Social Security Trustees call “low-income” annual earnings throughout their life-about $12,862 in 1996. Chart 5 also illustrates how the best intentions of Social Security’s defenders to help low-income minorities are frustrated by the program’s dismal rates of return.¹⁷  

The average real estate investments increased 7% per year between 1975 and 2005

Since then, after inflation, by 2011, it decreased by 46% 40 million invested in 1974 would be worth $316.5 billion by 2005, but only $170.9 billion by 2011, a mere 4.3 times after inflation increase       http://www.cbsnews.com/news/history-says-home-real-estate-is-a-bad-investment/     While the housing bust showed many people the dangers of investing in residential real estate, investors could have realized this long before, simply by paying attention to history. Prior to the bust, recent history made many investors feel comfortable that buying up houses would prove profitable. The recent Journal of Wealth Management paper “Measuring Residential Real Estate Risk and Return” noted that while there were a few individual quarters when the S&P Case-Shiller home price index fell, the overall trend for the 19-year period 1987-2005 was upward. The run-up in home prices was so great that for the 10-year period 1997-2006, the nominal and real returns were 9.7 percent and 7.1 percent, respectively. And from 2000 through 2006, the figures were 11 percent 8.2 percent, respectively. However, making decisions based on such evidence means falling prey to the mistake of recency bias, which is the tendency to give too much weight to recent experience while ignoring long-term evidence. (For more on recency bias, see my new book, Investment Mistakes Even Smart Investors Make.) Knowledge of the historical evidence would have led to the conclusion that prices don’t go straight up. In fact, in just the period 1972-1984, the U.S. had experienced three boom-bust cycles in housing prices: 1972, 1978 and 1984. Looking at the longer-term data, we also see quite a different picture. For the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. One can only imagine how many fewer investors would have piled into the residential home market if they were aware of the historical evidence. As Spanish philosopher George Santayana famously remarked: “Those who cannot remember the past are condemned to repeat it.” Yale professor Robert Shiller, in his book “Irrational Exuberance,” argued that home buyers may also be influenced by comparing simple returns on infrequent real estate transactions. Assume that a home in 2005 sold for 10 times the price it sold for in 1945. While that produces a simple return of 900 percent, the real (inflation-adjusted) annualized return was less than 1 percent. Another likely error made by homebuyers was that the simple rate of return ignores all of the costs of residential real estate — including significant transactions costs, closing costs, property taxes, maintenance, and improvement costs. An assumption of 1 percent for maintenance costs would yield a real return of below zero. The return on investment for a homeowner should also consider the imputed rental income (meaning the money you save by owning instead of renting), net of all costs. A study covering the period 1952-2005 found that when costs and imputed rental income were included, the real return to homeowners was 6.9 percent, comparable to the 7.3 percent real return for the S&P 500. Unfortunately, that analysis ends right about the time the bubble burst. At the end of 2005, the Case-Shiller Composite 20 home price index was 202.16. By October 2011, it had fallen all the way to 138.56, a drop of more than 31 percent. And since the consumer price index rose more than 15 percent over that period, the real loss on home prices was more than 46 percent. While the home price index was falling 31 percent, the S&P 500 provided a total return of over 13 percent over the same period. And the S&P 500 has since risen to 1,308 from 1,253 (as of Jan. 18), an increase of more than 4 percent (not including the return from dividends). You should never make any investment without understanding the nature of the risks involved. And it’s important to avoid the mistake of recency bias, which leads to buying yesterday’s winners (typically at high prices) and selling yesterday’s losers (typically at low prices). To avoid that error, you have to know the historical evidence. There’s another important point to make about residential real estate, especially your own home: A home does provide benefits beyond any consideration as an investment. And for many people, paying down the mortgage provides them with “forced savings.” However, although a home is clearly an asset that belongs on your balance sheet, along with any mortgage, it should be viewed as a consumption item, rather than an investment. There are things you can do with investments — like rebalance and tax-manage (or “harvest”) losses — that you simply can’t do with a home.      ]]>