Social Security as a bond?

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ZumZabo
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Social Security as a bond?

Post by ZumZabo »

Hello Friends and mentors, I have been lurking for quite some time and joined in December of ’14. I have done a few drive-by posts on some exhisting threads but this is my is my first original post. I thank all of you amazing minds for guidance and information I could find nowhere else, and with no ulterior motive. Your generosity is truly humbling.

My question is this: I have read several times, including this forum, that one could effectively consider SS as a bond position. How is it calculated and is it done literally as a bond position? Example: Husband and wife have $2,000 per month $24,000 per year in SS. Assume they would be using Intermediate bond index (BIV) as a bond position and the yield is 2%. (I know it is a little higher, 2.17% but just to deal in round numbers.) If they had an account size of $2,000,000 and wanted an AA of 50/50 would they own $1,600,000 in equities and $400,00 in BIV? To achieve $24,000 per year one would require the equivalent of $1,200,000 BIV at 2% that would be added to the actual $400,000 in bonds to bring it to the equivalent of $1,6000,000 bonds and $1,600,000 in equities. Is that how it would be considered?

Did I get the concept right?
Did I get the math right?
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ourbrooks
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Re: Social Security as a bond?

Post by ourbrooks »

Well, the Social Security retirement benefit is really two inflation adjusted annuities. One annuity is the spousal benefit; it pays as long as the primary beneficiary is alive, so, even though it's paid to the spouse, to determine its value, you need to use the life expectancy of the primary beneficiary. The second annuity lasts as long as the longest lived member of the couple so it should use the joint life expectancy of the couple.

There are accurate formulas for the present value of an annuity that take into account the age of the beneficiaries. Making an assumption about how long you'll live is less accurate and probably undervalues the Social Security benefit.

The next problem is that the value you'll get via these calculations is a present value in real dollars, since Social Security is adjusted for inflation. To compare it with bonds whose returns are nominal, you'd have make some assumption about how much bonds are likely to return in real terms and then adjust Social Security accordingly.

Sound like a lot of work? Yes, it is but that's what you'll have to do to get a reasonably accurate answer.

The main effect of all of these calculations will be to decrease your bond holdings and change your asset allocation to be heavier in stocks. A much simpler approach is just to go ahead and change your asset allocation; instead of 50/50, use 60/40.
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Re: Social Security as a bond?

Post by derosa »

It is a revenue stream.

It is not something that you buy and sell like a bond. If you have any doubts about that - try selling it to someone.

To put it another way what do you consider your paycheck? An equity?

Just look at it as something that reduces the need for your investments to produce income / gains / etc.
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Re: Social Security as a bond?

Post by beardsworth »

It's usually a good idea to use that "Search" box at the top of the page to look for past Bogleheads discussions on the same subject before starting a whole new thread. For example, doing searches for Social Security bond and Social Security as bond produced these:

viewtopic.php?t=124937&f=10

viewtopic.php?p=541869

viewtopic.php?f=10&t=119107

viewtopic.php?f=10&t=134006

viewtopic.php?f=10&t=130253

viewtopic.php?f=1&t=112827
lhl12
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Re: Social Security as a bond?

Post by lhl12 »

I would happily buy the Social Security revenue stream of anyone who wanted to sell. Similarly, I'd happily buy the pension revenue stream of anyone who wanted to sell. I doubt the price I'd be willing to pay is a price that the seller would accept, but I'd certainly pay more than zero.

Said another way, while it is certainly easier just to think of Social Security and pension payments not as portfolio assets but as revenue streams, that is a simplification. Social Security and Pension payments are hard to value because they incorporate life expectancies and long term discount rates. Just because they are hard to value doesn't mean they are not assets, however.
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Re: Social Security as a bond?

Post by nisiprius »

Since you can't buy it, can't sell it, since it doesn't mature, and since I can't find a market value for it on a brokerage statement, I think it does nothing but muddy the waters to regard Social Security as a bond.

I feel that because bonds are unpopular, there is a wave of desire to say "let me count some random thing I have as a bond so that I don't need to buy bonds."

It is logically consistent either to subtract Social Security from the needed income that the retirement portfolio must supply or to convert Social Security to a bond and add it to the retirement portfolio. Either way is fine as long as you get the same answer either way.

What I find deeply troubling is the idea that thinking of Social Security as a bond justifies a change in recommended stock allocation for retirees. If Social Security were some new innovation of the 1990s, then yes, its introduction would justify a change in recommended stock allocation.
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Re: Social Security as a bond?

Post by Levett »

Nisiprius wrote: "What I find deeply troubling is the idea that thinking of Social Security as a bond justifies a change in recommended stock allocation for retirees."

I share his concern. Such a "recommendation" (in quotes for a reason) completely overlooks the sense of real risk a retiree might feel if he/she has increased his/her equity allocation, trusting in such a "recommendation," and then the the equity market experiences a major grit-storm--possibly for a number of years? Then what?

What comfort will the "recommendation" provide as a retiree watches his/her increased equity allocation erode because some "expert" (likely a much wealthier person, and for whom Social Security may be chump change) has made such a dubious "recommendation?"

Be careful out there.

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Re: Social Security as a bond?

Post by 3504PIR »

Isn't SS referred to as a bond in Commom Sense, along with pensions, or am I remembering it incorrectly?
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Re: Social Security as a bond?

Post by ZumZabo »

nisiprius wrote:
Since you can't buy it, can't sell it, since it doesn't mature, and since I can't find a market value for it on a brokerage statement, I think it does nothing but muddy the waters to regard Social Security as a bond.

I feel that because bonds are unpopular, there is a wave of desire to say "let me count some random thing I have as a bond so that I don't need to buy bonds."



This is what I was thinking too. I have trouble considering something that is not a bond to be a bond. Other than predictable income, not much similarity. Thank you.
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Re: Social Security as a bond?

Post by Levett »

Here are the terms of the "debate." For me, I see no debate whatever. Social Security is not a bond.

http://paulmerriman.com/social-security-asset/

Lev
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Re: Social Security as a bond?

Post by friar1610 »

I've read about SS and pensions as bonds over the years and it never made a lot of sense to me personally. Instead I've figured out how much a year I need to live on. From that I subtract the annual value of my SS and pension. That produces a number I may need to make up from my portfolio. Then I allocate my portfolio between equities and fixed income in ratios that are likely to produce that annual number with a withdrawal rate I can live with and still sleep nights. That also lets me follow the KISS principle.
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Re: Social Security as a bond?

Post by john94549 »

Social Security is no more a bond than the (currently) tax-free income thrown off by our rental condo. It's an income stream. If you want "apples-to-apples", it's probably "worth" the cash-surrender value of an equivalent annuity. Which might be considered as a "bond". Of course, you have to fiddle with the tax. Federal, max 85% X marginal, states some zero (CA), others go figure. It's complicated.

You can't just back-calculate and say "wow, I have Social Security, and it supplants 20% of the fixed-income I need in retirement, so rather than 60/40, I can use 80/20".
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Re: Social Security as a bond?

Post by RetiredinKaty »

Just my thoughts:

The presence of social security increases our capacity to take risk but lowers our need to do so, if you view risk as exposure to stocks necessary to produce a certain income.

We own stocks in retirement to help address longevity risk and inflation risk. Social security provides some income and eliminates longevity risk and inflation risk on said income. Therefore it must logically displace both bonds and stocks in the nest egg.
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Re: Social Security as a bond?

Post by AndrewXnn »

Zumzabo;

Yes; your math is correct.

and yes; some of the comments on this thread are correct that since social security can not be traded it is not equivalent to bonds (technically).

However, your math also illustrates just how terrible an investment bonds have become.

$1.2M to provide income of $24K/year.... think about that.

50 years of savings to provide a single year of income.
That is a lot longer than a normal career and for some folks it's a lifetime.

and if interest rates rise, guess what happens to that $1.2M? (it's not good).

So, why invest in something as lousy as bonds at all?

...diversification?

...experts say you should?

...everybody else is?

...safety?
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Re: Social Security as a bond?

Post by ogd »

Zumzabo: it's not a bond, it's an annuity of sorts. The big difference is that a bond or a fund has an ending value and doesn't "run out" like SS or an annuity when a certain term or certain events happen.

For such investments, you expect considerably higher interest than bonds. The math is not compatible.

I was never a fan of counting Social Security as a bond with a certain value, but at best "softly" deciding you can afford to take more risk -- or that you don't need to, depending on your point of view.

Despite the current low yields, bonds will continue to be a great risk dampener in a balanced portfolio. I strongly advise having a hefty amount close to retirement.
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Re: Social Security as a bond?

Post by ogd »

AndrewXnn wrote:and if interest rates rise, guess what happens to that $1.2M? (it's not good).
It starts making more money, despite the initial loss. In a relatively short time, it pulls ahead.
AndrewXnn wrote:So, why invest in something as lousy as bonds at all?
Because they don't go to heck when everything else does. This is immensely important. That you risk some years of low yields or a few percent value drop followed by higher yields is a small price to pay.
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Re: Social Security as a bond?

Post by pascalwager »

What I find deeply troubling is the idea that thinking of Social Security as a bond justifies a change in recommended stock allocation for retirees. If Social Security were some new innovation of the 1990s, then yes, its introduction would justify a change in recommended stock allocation.
Mr. Bogle recently said that he doesn't like the idea that the Vanguard Target Retirement Funds are not adjusted to account for social security income. So he must think that 70% bonds is excessive for most retirees.
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Re: Social Security as a bond?

Post by gordoni2 »

If there wasn't any Social Security 50/50 would be a reasonable asset allocation (independent of age and for all but the largest of portfolio sizes).

In the presence of Social Security a 50/50 asset allocation becomes:

%stocks = 50% x (1 + net present value of expected future Social Security / investment portfolio size)

This is much harder to communicate. It is easier to say:

50% stocks with Social Security treated as a bond

Even though technically Social Security isn't a bond, it still needs to be accounted for in determining your asset allocation. Thinking of Social Secuirty as if it were a bond is one way of doing this.
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Re: Social Security as a bond?

Post by ZumZabo »

Thank you all for your varied and valid comments. Apologies for being tardy to respond, I was called away and just now returned to a computer.
derosa wrote:It is a revenue stream.

It is not something that you buy and sell like a bond. If you have any doubts about that - try selling it to someone.

To put it another way what do you consider your paycheck? An equity?

Just look at it as something that reduces the need for your investments to produce income / gains / etc.
Well put and this is where my thinking was to start with.
friar1610 wrote:I've read about SS and pensions as bonds over the years and it never made a lot of sense to me personally. Instead I've figured out how much a year I need to live on. From that I subtract the annual value of my SS and pension. That produces a number I may need to make
up from my portfolio. Then I allocate my portfolio between equities and fixed income in ratios that are likely to produce that annual number with a withdrawal rate I can live with and still sleep nights. That also lets me follow the KISS principle.
Again, just as I was thinking before I started the research. Still in that camp.
AndrewXnn wrote:$1.2M to provide income of $24K/year.... think about that.

50 years of savings to provide a single year of income.
That is a lot longer than a normal career and for some folks it's a lifetime.

and if interest rates rise, guess what happens to that $1.2M? (it's not good).
Very interesting point looking at it through that lens. Just illustrates how accustomed we have become to obscenely low rates. I'm surprised that I'm not surprised by the amount of money that it takes to produce a reasonable income from bonds alone. Of course that is if one is looking at the bonds solely as a income source as opposed to a ballast to balance a portfolio. Even if the SS is considered a bond, it still would not be evident when looking at the portfolio since it is not represented on the account statement (as nisiprius stated) and would give little comfort in a downturn. Not convinced that there is no reason to own bonds.
ogd wrote:Zumzabo: it's not a bond, it's an annuity of sorts. The big difference is that a bond or a fund has an ending value and doesn't "run out" like SS or an annuity when a certain term or certain events happen.

For such investments, you expect considerably higher interest than bonds. The math is not compatible.

I was never a fan of counting Social Security as a bond with a certain value, but at best "softly" deciding you can afford to take more risk -- or that you don't need to, depending on your point of view.

Despite the current low yields, bonds will continue to be a great risk dampener in a balanced portfolio. I strongly advise having a hefty amount close to retirement.
Agreed
RetiredinKaty wrote:We own stocks in retirement to help address longevity risk and inflation risk. Social security provides some income and eliminates longevity risk and inflation risk on said income. Therefore it must logically displace both bonds and stocks in the nest egg.
I really relate to that. It seems logical to consider SS neutral as far a AA goes and just an income stream to supplement portfolio income or or use portfolio income to supplement SS depending which is the primary source of income.
Last edited by ZumZabo on Sat Feb 14, 2015 9:08 am, edited 1 time in total.
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Re: Social Security as a bond?

Post by FinancialDave »

3504PIR wrote:Isn't SS referred to as a bond in Commom Sense, along with pensions, or am I remembering it incorrectly?
You are exactly correct, on page 88 (2010 version Common Sense on Mutual Funds) John Bogle calls pensions & SS "bondlike" investments.

IMO if they are bondlike then you should treat them as such in your investing strategy.

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Re: Social Security as a bond?

Post by Fixmen »

Whenever this type of question comes up, the thing that seems to be missing from the conversation is the context. In other words, why are you trying to think about SS as a Bond. What question are you trying to answer for yourself? The approach is different whether you are trying to create a family budget or whether your trying to adjust AA. In the former, you are concerned with cash flows in which case it seems reasonable (albeit a little unnecessary) to model SS as a bond that you don't sell. In the latter, it makes less sense since you should be looking at AA from a risk/exposure perspective; Bonds and SS have different underlying risks/exposure, namely SS is inflation indexed while most bonds aren't.
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Re: Social Security as a bond?

Post by rmark1 »

Social Security should be valued in a portfolio as a COLA'd annuity, not literally as a bond. Valuing it as a bond usually leads to a mismatch between the payment you receive versus the withdrawal you'd make from the lump sum value. Annuity values are driven as much by life expectancy as interest rates.
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Re: Social Security as a bond?

Post by Rodc »

derosa wrote:It is a revenue stream.

It is not something that you buy and sell like a bond. If you have any doubts about that - try selling it to someone.

To put it another way what do you consider your paycheck? An equity?

Just look at it as something that reduces the need for your investments to produce income / gains / etc.
Right. One can consider it a pumpkin too if they want (but that won't make it so).

I consider it a high likelihood income stream that increases with inflation. Tax treatment might change. Or there may be some other changes so not guaranteed, but highly likely to continue in large measure.

Easier and more clear to just consider that it reduces the income you need to generate on your own.

FWIW as noted above this has been beaten to death and if one is careful one can consider it a bond and end up with a sensible asset allocation so this is not outright bad. But why would one do this?
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Re: Social Security as a bond?

Post by joe8d »

friar1610 wrote:I've read about SS and pensions as bonds over the years and it never made a lot of sense to me personally. Instead I've figured out how much a year I need to live on. From that I subtract the annual value of my SS and pension. That produces a number I may need to make up from my portfolio. Then I allocate my portfolio between equities and fixed income in ratios that are likely to produce that annual number with a withdrawal rate I can live with and still sleep nights. That also lets me follow the KISS principle.
Exactly.
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Re: Social Security as a bond?

Post by TPS_Reports »

Whenever I see a post like this, I'm always curious if the people posting are collecting social security. (or close to that time)

While I agree with this-
"The right approach is to think of Social Security as income that reduces the amount you need to take out of your portfolio in retirement."

With 20+ years to retirement, how does one estimate this when the government can change the system? From my understanding, at one time SS was not taxed but then it was changed so it is taxed now.
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Re: Social Security as a bond?

Post by abuss368 »

Jack Bogle has been speaking about this for a while now. I simply can not do this as I would be up at night. I like the allocation to bonds which provide both safety and income to our portfolio. During market declines, the bond funds provide an opportunity to rebalance back into stocks. This worked well during the financial crisis.
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Re: Social Security as a bond?

Post by ZumZabo »

TPS_Reports wrote:Whenever I see a post like this, I'm always curious if the people posting are collecting social security. (or close to that time)
As the OP I am not collecting SS. I am 54 years old. Close enough that if I were planning to consider SS as a bond position, I could begin factoring it into the mix.
derosa wrote:FWIW as noted above this has been beaten to death
I apologize for not searching previous posts before posting. I had no idea that it had been discussed so much. As I stated above, I had seen it discussed on this forum but didn't conduct an exhaustive search.
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Re: Social Security as a bond?

Post by TPS_Reports »

ZumZabo wrote: I apologize for not searching previous posts before posting. I had no idea that it had been discussed so much. As I stated above, I had seen it discussed on this forum but didn't conduct an exhaustive search.
People have called SS a pension, bond, entitlement, benefit, annuity (and probably other names). Especially for people further out from retirement, I would call it a tax. There's no guarantee on what the payout will be. I have even read that it could be means tested- so if you have income above a certain threshold, you get a reduced amount.
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Re: Social Security as a bond?

Post by ZumZabo »

TPS_Reports wrote:
People have called SS a pension, bond, entitlement, benefit, annuity (and probably other names). Especially for people further out from retirement, I would call it a tax. There's no guarantee on what the payout will be. I have even read that it could be means tested- so if you have income above a certain threshold, you get a reduced amount.
In all of my planning for retirement and FI, I frankly never considered SS as a part of my future income. I was never confident that it would be available to me. I considered it to be a black hole into which I was dumping money that was being extracted from me under threat of prison and given to others. I planned assuming I was on my own. I will have no pension, just what I have accumulated on my own. I am doing quite well by means of LBYM, an amazing, like minded spouse and an uncluttered lifestyle. Now it seems I will likely have some SS benefit but I find it difficult to believe that there will not be some type of means testing that will cost me because I have accumulated what would be considered a sizable nest egg. I remember a comment in one of Ben Stein' books that stuck with me, paraphrasing, I don't have the exact quote: "In retirement, those who planned, saved and invested are going to have to pay for those who did not". IMO yet another reason not to consider SS as a bond. The availability and income stream are potentially unpredictable, although these changes typically happen slowly and one would presumably have time to adjust.
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Re: Social Security as a bond?

Post by abuss368 »

This would probably make a good poll question!
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Re: Social Security as a bond?

Post by ZumZabo »

Be sure to search previous posts first. :D :D :D
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Re: Social Security as a bond?

Post by J295 »

For what it is worth, at age 55 I'm aware that if we live long enough we will someday be able to receive benefits, which we treat as a safety net rather than something that impacts our current spending or asset allocation.
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Re: Social Security as a bond?

Post by ZumZabo »

J295 wrote:For what it is worth, at age 55 I'm aware that if we live long enough we will someday be able to receive benefits, which we treat as a safety net rather than something that impacts our current spending or asset allocation.

If I am receiving a regular income from SS I would certainly consider it part of current spending. It would decrease the income I need from my portfolio and positively impact my SWR, allowing my portfolio to grow more and decrease the likelihood of a shortfall. It would not increase my current spending but it would decrease the burden on the portfolio.
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Re: Social Security as a bond?

Post by abuss368 »

I would be interested in a tread such as this one, or a poll question, during the next big sell off or back in 2008 - 2009. I would expect the responses would be a lot different!
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Re: Social Security as a bond?

Post by ZumZabo »

abuss368 wrote:I would be interested in a tread such as this one, or a poll question, during the next big sell off or back in 2008 - 2009. I would expect the responses would be a lot different!
I would say that the consensus on this thread is primarily don't use SS as a bond allocation in ones portfolio. Do you feel that a major downturn would change that or just move the needle from "no" to "NO!"?
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Re: Social Security as a bond?

Post by EyeDee »

.
Why is it that so many people on this board defend Mr. Bogle's recommendation for 20% or less of international stock, but very few support his recommendation to treat Social Security as a bond?

Disclosure, we target for more than 20% in international and do not calculate Social Security as a bond, but do keep Social Security in mind some in setting stock/bond allocation.
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Re: Social Security as a bond?

Post by ZumZabo »

EyeDee wrote:.
Why is it that so many people on this board defend Mr. Bogle's recommendation for 20% or less of international stock, but very few support his recommendation to treat Social Security as a bond?

Disclosure, we target for more than 20% in international and do not calculate Social Security as a bond, but do keep Social Security in mind some in setting stock/bond allocation.
International stocks are a bona fide identifiable asset class. The only decision is how much,if any, to allocate. Social Security as a proxy for a bond that isn't really a bond. It doesn't act like a bond and there's no single way to quantify how much of a bond position it would represent for AA. My 2 cents.
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Re: Social Security as a bond?

Post by Johno »

SS is a basically an annuity. Like an annuity, it's not literally a bond, but I don't think it makes sense to get too tied up in literalisms depending on context. The fact that you can't sell SS benefits is relevant in some contexts, but basically irrelevant in a risk allocation context. You have these benefits (almost all Americans are eligible eventually), what if anything do they closely resemble in risk and return terms?

And the answer is obvious IMO: SS closely resembles long term US govt bonds, especially inflation adjusted ones for risk allocation purposes. It's essentially the same credit risk*, IOW having more govt bonds other than SS increases one's wager on the term 'riskless' for US govt credit turning out to be literally true in their remaining life time. And it's similar return to inflation adjusted bonds and more so private inflation adjusted annuities (though latter have different credit risk). I think a tell it like it is approach would say yes, for risk purposes SS is basically 'a bond'. If one thinks people will use that correct information to make wrong decisions (too risky an allocation) then I think they should combat that directly.

I also don't agree you can't PV Social Security in a spreadsheet to a reasonable ball park. The stock market can easily move 10% in a few weeks, whereas promised SS benefits are very unlikely to have changed by then. And just looking some things up and doing a little spreadsheet manipulation can calculate a PV of SS benefits to a similarly close tolerance at least.

*SS benefits might eventually be cut to avoid a restructuring of US debt, or a restructuring of US debt might be used in part to avoid cutting SS benefits so not exactly the same risk; I'm not predicting either event, but I don't believe either possibility is entirely negligible in the longer term.
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Re: Social Security as a bond?

Post by fedsocprof »

Johno wrote:SS is a basically an annuity. Like an annuity, it's not literally a bond, but I don't think it makes sense to get too tied up in literalisms depending on context. . . .

I also don't agree you can't PV Social Security in a spreadsheet to a reasonable ball park. The stock market can easily move 10% in a few weeks, whereas promised SS benefits are very unlikely to have changed by then. And just looking some things up and doing a little spreadsheet manipulation can calculate a PV of SS benefits to a similarly close tolerance at least.
Agreed. For examples of this type of treatment of Social Security, see William Reichenstein, Retiree Stock Allocation Recommendations: Do You Fit the "Mold"? I'm not sure if I am able to post the link to this article, but here it is: http://www.aaii.com/features/jrnl200402p25.pdf

If the link doesn't work, just google it.
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Re: Social Security as a bond?

Post by curmudgeon »

EyeDee wrote:.
Why is it that so many people on this board defend Mr. Bogle's recommendation for 20% or less of international stock, but very few support his recommendation to treat Social Security as a bond?
There are a lot of people on this board who are very religious about their asset allocation. I don't find it useful to get into arguments about what is/isn't a bond. I do view collecting SS and having a paid-off house as reducing the need to hold bonds, but I worry more about inflation risk than I do about market volatility.
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Re: Social Security as a bond?

Post by fed123 »

For practical purposes I have been categorizing it in my portfolio as "cash," since it now possible to derive some numbers from the statements that SSA provides.
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Re: Social Security as a bond?

Post by Browser »

Probably already been said but Social Security is not a bond -- you should be so lucky to own a bond like this. It is an inflation-adjusted lifetime joint annuity with survivor benefits. Taking into account the secure income provided by Social Security you might not need as much in bonds in your retirement portfolio to provide a safe income floor, which means you might be able to raise your equity allocation if you're really greedy or need to roll the dice to afford a new bimmer every 2 years instead of every 4 years. So in that sense, it might reduce the bond allocation you might otherwise want to have, but it is not a bond. It is way, way better than a bond could ever be even if it were raised by good parents and got to go to Harvard.
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Re: Social Security as a bond?

Post by Mel Lindauer »

I rarely disagree with Jack, but I do on this issue. SS is NOT a bond. Rather, it's an income stream that reduces the amount you need to withdraw from your "real" portfolio.

Try selling your Social Security.
Try using it to rebalance.
Try leaving it to your heirs.

With real bonds, you can do all three. With SS, you can do none of them (except for the $255 death penalty).
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Re: Social Security as a bond?

Post by ZumZabo »

Mel Lindauer wrote:I rarely disagree with Jack, but I do on this issue. SS is NOT a bond. Rather, it's an income stream that reduces the amount you need to withdraw from your "real" portfolio.

Try selling your Social Security.
Try using it to rebalance.
Try leaving it to your heirs.

With real bonds, you can do all three. With SS, you can do none of them (except for the $255 death penalty).
Agreed. Thank you Mel and everyone who contributed. I very much appreciate the advice and input. I feel I have had the question answered in my mind.
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Re: Social Security as a bond?

Post by BTDT »

Browser wrote:Probably already been said but Social Security is not a bond -- you should be so lucky to own a bond like this. It is an inflation-adjusted lifetime joint annuity with survivor benefits. Taking into account the secure income provided by Social Security you might not need as much in bonds in your retirement portfolio to provide a safe income floor, which means you might be able to raise your equity allocation if you're really greedy or need to roll the dice to afford a new bimmer every 2 years instead of every 4 years. So in that sense, it might reduce the bond allocation you might otherwise want to have, but it is not a bond. It is way, way better than a bond could ever be even if it were raised by good parents and got to go to Harvard.
This is the best answer I have seen thus far. Without SS and government pensions, my allocation in retirement would be more fixed than equities. :beer
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Re: Social Security as a bond?

Post by midareff »

ZumZabo wrote:nisiprius wrote:
Since you can't buy it, can't sell it, since it doesn't mature, and since I can't find a market value for it on a brokerage statement, I think it does nothing but muddy the waters to regard Social Security as a bond.

I feel that because bonds are unpopular, there is a wave of desire to say "let me count some random thing I have as a bond so that I don't need to buy bonds."



This is what I was thinking too. I have trouble considering something that is not a bond to be a bond. Other than predictable income, not much similarity. Thank you.

+1 .. and to add. Unlike portfolio assets it can't be inherited or donated to charity. If you need to derive income from your investment portfolio it is an income stream or you are deceiving yourself. If you have SPIA's, pensions, SS and other fixed streams that enable you to not need any income from your investment portfolio than I can recommend you get closer to Operation Smile, UNICEF, Fred Hollows Foundation and the Wounded Warrior Project... or a few of your own favorites.
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Re: Social Security as a bond?

Post by midareff »

TPS_Reports wrote:Whenever I see a post like this, I'm always curious if the people posting are collecting social security. (or close to that time)

While I agree with this-
"The right approach is to think of Social Security as income that reduces the amount you need to take out of your portfolio in retirement."

With 20+ years to retirement, how does one estimate this when the government can change the system? From my understanding, at one time SS was not taxed but then it was changed so it is taxed now.

As a recent (almost three years) you touched on a concern I had for both pension and SS as I entered the last decade of employment. If you are thinking in terms of living your retired years on 70% of your working income, and need SS to do that I'd say that's way too close. Personally, I do think the government may change the system by moving retirement age back a year or two over one or two decades and may change indices from the CPI-U to the C-CPI-U which might reduce the cola approximately .3% annually. Over a year or two it's not much of a different, over several decades it becomes a big chunk.

Save all you can and then some. If you are too successful at this you can always raise your standard of living in retirement.
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Re: Social Security as a bond?

Post by Leeraar »

To paraphrase Bill Bernstein at Bogleheads 2013: If you count SS as a bond and come up with a different Asset allocation, you have an accounting problem, not an investing problem.

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