Data & Research April 23, 2012

Social Security To Be Exhausted By 2033

The annual Trustees report on the financial health of Social Security Trust Funds says funds will be exhausted by 2033, three years sooner than projected last year.
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According to the report, the Disability Insurance (DI) Trust Fund will be exhausted in 2016, two years earlier than last year’s estimate. The report also projected that the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) program costs will exceed non-interest income in 2012 and will remain higher throughout the remainder of the 75-year period.

Also announced in the report:

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•  The projected point at which the combined Trust Funds will be exhausted comes in 2033 – three years sooner than projected last year.  At that time, there will be sufficient non-interest income coming in to pay about 75% of scheduled benefits;

•  The projected actuarial deficit over the 75-year long-range period is 2.67% of taxable payroll—0.44 percentage point larger than in last year’s report;

•  Over the 75-year period, the Trust Funds would require additional revenue equivalent to $8.6 trillion in present value dollars to pay all scheduled benefits;

•  Income including interest to the combined OASDI Trust Funds amounted to $805 billion in 2011. ($564 billion in net contributions, $24 billion from taxation of benefits, $114 billion in interest, and $103 billion in reimbursements from the General Fund of the Treasury—almost exclusively resulting from the 2011 payroll tax legislation); and

•  Total expenditures from the combined OASDI Trust Funds amounted to $736 billion in 2011.

 

The report also said:

•  Non-interest income fell below program costs in 2010 for the first time since 1983. Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period;

•  The assets of the combined OASDI Trust Funds increased by $69 billion in 2011 to a total of $2.7 trillion;

•  During 2011, an estimated 158 million people had earnings covered by Social Security and paid payroll taxes;

•  Social Security paid benefits of $725 billion in calendar year 2011. There were about 55 million beneficiaries at the end of the calendar year;

•  The cost of $6.4 billion to administer the program in 2011 was a very low 0.9% of total expenditures; and

•  The combined Trust Fund assets earned interest at an effective annual rate of 4.4% in 2011.

“This year’s Trustees Report contains troubling, but not unexpected, projections about Social Security’s finances.  It once again emphasizes that Congress needs to act to ensure the long-term solvency of this important program, and needs to act within four years to avoid automatic cuts to people receiving disability benefits,” said Michael J. Astrue, commissioner of Social Security.
 

Data & Research April 23, 2012

Portfolio Study Shows Low-Risk Stocks Outperform High-Risk

Conventional wisdom about how high-risk stocks perform compared with low-risk ones is completely wrong, a study found.  
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 The greater the risk, the higher the rewards, right?

Not so fast. A study of stock performance by the research firm Haugen Custom Financial Systems (HCFS) found that high-risk stocks consistently underperform low-risk stocks, both across time and across countries.  

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High-volatility stocks can outperform lower-volatility stocks, but generally only for a year or two, said Bob Haugen, chief executive of HCFS, an economist and investment analyst. “I don’t know why anyone in the world wouldn’t want to use this information,” he told PLANADVISER. 

HCFS sorted stocks from 23 countries by risk, calculated the standard deviation of returns for each stock within a country using the last 24 months of returns. Stocks were sorted from lowest to highest risk. Ten groups or portfolios were formed by placing 10% of the risk-sorted stocks in each. For example, if there were 1,000 stocks in a country, they took the 100 lowest-risk stocks in the first group, the next 100 in the second, and so on, until the highest-risk stocks were in the 10th decile portfolio.

 

(Cont'd)

They calculated the return of each of the portfolios over the next month and repeated the procedure for 264 months. The entire process was repeated for each of the developed countries as well as for a universe of the top 3,000 stocks in the world. Finally, they calculated return and risk of each portfolio and found that the low-risk groups remained low-risk over time. But the low-risk group outperformed the higher-risk group in every country.

The lowest-risk group won by an average of 17% per year over the high-risk portfolio. Although there was some variation in consistency across countries, the low-risk portfolio was the winner about 75% of the time.

High-volatility stocks can outperform lower-volatility stocks, but generally only for a year or two, Haugen said.

The procedure and results of the HCSF study can be seen here.

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