joetaxpayer <joetaxpayer[at]nospam.com> writes:
- quote -

There are probably other reasons, but two big reasons that
one computes a net worth - and may want to consider an
equivalent value for the SS - are (a) estimating risks and
determining an asset allocation strategy; and (b) figuring
out how close one is to having saved for a goal (ie. retirement).

In the former case, the PV of one's SS may be considered
very conservative assets - more akin to TIPs or cash than
even bonds. The steady income from SS ofsets some of the
volatility that one gets from other asset classes.

In the latter case, folks often start by saying "I need
$x to live on. So I need $x times 25 (or whatever) in
order to have a nest egg which will throw off $x each
year". For that computation, one might reasonably either
say he needs $x - annual-SS-income -- or one might stick
with $x to begin with and add the PV of SS when checking
against the ($x time 25).

Either way, SS has a substantial value and should, in
most cases, be considered at least partially, when
looking at one's portfolio and income and savings goals.

The further away from retirement one is, however, the
more I'd discount the value. A 30 yr old who gets his
statement from SS saying he's going to be collecting
$2000/mo after he turns 67 - while I' wouldn't tell him
that he's not going to get anything, inasmuch as it's
37 years away, he might as well, at least for the moment,
not worry about including it in his calculations - that
$2000/mo was generated by SS based on a projection that
he's going to keep earning as he is now for the next
30+ years. Big assumption and too far out to put much
weight onto.

--
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Greg Hennessy <greg.hennessy[at]localhost.localdomain> writes:

- quote -

However, you may take out a loan (perhaps with no collateral,
or collateralized by something else) and pay back that loan
over time with your incoming SS money.

It has no direct secondary market value (ie. you cannot
sell it) but neither can you sell treasury savings bonds.

Yet both have value.

--
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On Mar 20, 2:08 pm, "bo peep" <cowartmi...[at]yahoo.com> wrote:
- quote -

Immediate annuities only guarantee the income while you're alive.
There are some variations like joint survivorship or a minimum time
guarantee.

- quote -

That's why it pays to postpone buying an annuity. If you have health
problems, you may be able to get a higher annuity to compensate for a
shorter longevity.

--
Ron

On Mar 19, 8:36 am, "Ron Peterson" <r...[at]shell.core.com> wrote:
- quote -

That doesn't seem right either - an immediate annuity represents not
just an earnings stream, but also (eventually) a return of principal,
a feature not usually present in stock investments.

According to http://www.immediateannuities.com if you want a monthly
income of $1,000 for life, it only requires an investment of $57,134 -
that's a steady annual return of almost 21% per year, indefinitely. I
don't know of any stock that will do that reliably. In order to
facilitate the computation, I'm assuming that you are 90 years old ;> )

John Cowart

In article <etmk7h$3f7c[at]odds.stat.purdue.edu> ,
dsmoore[at]stat.purdue.edu (David Moore) wrote:

- quote -

Thank you for that correction.

A participant stated that the annual increase in SS benefits is
tied to an index of wages rather than to the Consumer Price Index.
That's not correct. The annual index is based on the CPI. To
quote from the 2006 Annual Report of the SS trustees:

"For December 2006, the benefit increase is the percentage increase in
the Consumer Price Index for Urban Wage Earners and Clerical Workers
from the third quarter of 2005 to the third quarter of 2006."

But the _starting point_ for SS benefits _is_ tied to an index of
wages. In effect, each age cohort of SS beneficiaries gets higher
benefits in real terms than previous age cohorts because wages
tend to rise more rapidly than prices. The idea is that SS should
roughly replace a constant proportion of wages. The actual process
is much more complicated than that: lifetime earnings (up to the
annual SS max) are adjusted by an index of wages, then a formula
involving 2 "bend points" is applied so that higher earnings get
less credit -- SS is an income transfer program that replaces
more of the earnings of low-income earners than of better-off folk.

The SS "crisis" (which is trivial compared with Medicare) could
be dealt with by indexing starting benefits to prices rather than
wages or by fiddling with the bend points to pay less to higher
earners, or by raising the max income subject to SS tax, or by
combinations of these or other mesaures. Because the "crisis"
is still a few years off, there's no political will to do anything
now. So more drastic measures will eventually be required.

David

On Mar 18, 11:59 pm, "bo peep" <cowartmi...[at]yahoo.com> wrote:
- quote -

Yes, but the whole idea of cash value is imprecise. The OP was leaving
out any consideration of the retiree's age or health.

One could likewise argue that the cash value of an annuity should be
lower because it could be invested in the stock market to get the same
income stream.

--
Ron

- quote -

You are right. A plain annuity pays about 7% for a 65 year old,
while an inflated protected one pays about 5.5% plus annual
inflation adjustment.

In article <1174280363.315747.188990[at]d57g2000hsg.googlegroups.com> ,
"bo peep" <cowartmisc1[at]yahoo.com> wrote:

- quote -

The annual Social Security adjustment goes as the increase in average
wage levels (for some rather complex definition of that), not the CPI
or other "cost of living" indexes. Historically, this increase has
been greater than the corresponding changes in CPI. One of the things
currently urged to stave off the approximate 25% reduction in benefits
that would occur after the SS "trust fund" inputs are exhausted is to
change the adjustment _down_ to the CPI change.

Thus, for getting an estimate of the nominal "capitalization" of your
Social Security benefit, you need to throw in an additional factor on
top of the premium for COLA adjustments to accommodate this difference,
and maybe then a second order negative delta to factor in the political
"risk" (the near certainty that _some_ change to the system will be in
place in a couple of decades).

On Mar 16, 10:54 pm, "Ron Peterson" <r...[at]shell.core.com> wrote:
- quote -

That doesn't seem right - Social Security and many state retirement
plans incorporate annual COLA increases. If you live for 20 or 30
years in retirement, that is a big difference, compared to a plain
immediate annuity.

John Cowart

On Mar 2, 2:09 pm, Ed Wicks <EdWi...[at]noplace.net> wrote:
- quote -

Calculate the value of the payments assuming that they are an
immediate annuity. See http://www.immediateannuities.com/ .

If there are survivor benefits, the cash value of the annuity will be
higher.

--
Ron

- quote -

Near correct answer, but for wrong reason.
These are inflation-adjusted immediate annuities.
Currently static immediates pay about 7.5% for
65 year old male and 5.5% for inflation annuity.

On Mar 3, 10:10 am, Greg Hennessy
<greg.henne...[at]localhost.localdomain> wrote:
- quote -

But it has value to you.

For example, you could save your entire SS income, and pass it on to
your children or other inheritors.

Or you could borrow money, and repay it using your SS income.

In either sense, you have 'sold' your SS income stream.

An income stream is an income stream. The best equivalent is an
inflation indexed life annuity, with spousal death benefit. *that*
you can buy in the marketplace, so you can use the cost of it as a
value benchmark against Social Security.

On Mar 2, 10:15 pm, "Mark Freeland" <BnetOne...[at]sbcglobal.net> wrote:
- quote -



What SS is closest to, analytically, I think, is a COLA indexed
annuity with survivor benefits.

Since that is also purchasable with a lump sum, one can work out what
that lump sum would be (a fairly frightening number, for most).

SS benefits from being universal, whereas annuity buyers are a
particularly privileged group in terms of lifespan, ('adverse
selection') and so get less benefit, in aggregate, from their money.

A further complication raised by several posters is that the de facto
estate tax on SS benefits is 100% *after* your spouse dies.

On 2007-03-02, Mark Freeland <BnetOnewsX[at]sbcglobal.net> wrote:
- quote -

Well, I can't sell my social security income, so by that standard it
is an asset with no value.

Ed Wicks wrote:
- quote -

Ed-
What's the purpose of doing it? If it's just curiosity I'd suggest going
to the Vanguard web site and quoting out the cost of an immediate
annuity with annual inflation adjustments. That's a decent proxy for
Social Security. This came up in a recent thread on this group (January
- "Social Security Rate of Return") and for a male in CA of retirement
age it was about $230,000 per $1k/month in benefits. If you're not yet
at retirement age you might discount that figure back based on years
till retirement.

With this type of valuation, Social Security ends up being the most
significant asset on most retirees' balance sheets.

-Tad

One more comment, then I'll shut up. The posters who have stated
that SS payments are simply income overlook the basic accounting
fact that the _right to receive_ future payments is an asset.

I was reminded of this some years ago by an attorney. I receive
substantial income from book royalties. The right to my future
royalty payments is not only an asset but is an asset subject to
estate tax if my wife and I both die before the royalties tail
off. The attorney predicted a battle between experts engaged by
the IRS and my estate to value this asset. We immediately
bought a second-to-die life insurance policy (in an ILIT) to
help our heirs pay estate taxes if needed.

David

Valuation of SS (and other defined benefit) payments is an
interesting and often overlooked issue in personal finance.

I don't count capitalized SS payments as net worth. I do
count SS as "fixed income" in calculations for asset allocation.

For asset allocation purposes, I value all assets after tax. This
reduces the value of e.g. IRA account assets as well as SS. What
matters is how much of my IRA I can spend.

The present value of future SS payments depends on the discount rate
(interest rate used to bring payments received at different times to
the same time, most often the present). To help see your "true" asset
allocation, it's enough to make a rough guess at interest rates and to
assume that SS payments continue forever. (Because they do continue
until you are dead, after which you don't care about asset allocation
-- and you can't pass them to your kids, which is why I leave them out
of net worth.) The present value of an eternal stream of fixed
payments (SS is roughly fixed in real terms because of its COLA) is a
simple calculation.

If you are a detail person, you can worry about what your spouse will
get from SS after you are gone. More seriously, if you have other
defined benefit payments, you will have to take account of inflation
(by guessing a real rather than nominal discount rate). The SS COLA is
a glorious and expensive benefit not available in most other defined
benefit programs.

An underlying issue here is the pervasive shift from defined benefits
to defined contributions in retirement plans. I look much richer than
my parents, partly because of large IRA and 403b accumulations. But my
parents participated in Tier 1 of the New York State Teachers
Retirement Plan, called by one expert the best retirement plan in the
history of the world. My mother is now 93, and more than 2/3 of her
New York pension consists of the blessed COLA (cost of living
adjustments). How big a pot would she have needed when she retired at
age 62 to provide this? SS is one of the few remaining links to
the old days.

David

On Mar 2, 2:09 pm, Ed Wicks <EdWi...[at]noplace.net> wrote:
- quote -

They are valued the same way any financial asset is -- by projecting
expected cash flows (incorporating life expectancy in this case) and
discounting them. You could look at the prices of inflation-indexed
annuities, which do incorporate some profit for the insurer, but they
are more relevant if you are about to retire.

There is political risk that Social Security benefits will be reduced,
especially for higher income workers -- proposals have been made to
have their projected benefits grow with inflation, not average wages.
Since state governments, unlike the federal government, cannot print
money, there is small but nonzero credit risk in a state retirement
plans, just as municipal bonds have credit risk (which is often
mitigated by insurance). I have read that many state and local
governments, for example the city of San Diego, have made promises
that will be difficult to keep.

On Mar 2, 7:09 pm, Ed Wicks <EdWi...[at]noplace.net> wrote:
- quote -

A rule of thumb is to take 25 times your expected benefit (or 20
times). Being the amount of money you would need to buy an inflation
indexed annuity providing that benefit (although the benefits your
spouse may receive post your death complicates the picture even more).

You would then need to discount back to the present day.

I would suggest you use a long term US treasury bond rate to do so as
this cash flow is essentially risk free.

So say you are due to retire in 20 years time, with a projected
benefit of $12,000 a year.

You could calculate the present value in two ways:

1. make the assumption that the benefit will rise by 4.5% pa (ie the
discount rate). Your benefit is thus 25X12k = $300k as a current
balance sheet amount

2. you make an assumption regarding the growth in benefits between now
and then, say 2.5% pa

(1 + 0.025) to the power 20 = future benefit = > 19,663 pa. Multiply
by 25

divide that FB by (1.0 +045) to the power 20 (ie the risk free bond
rate compounded for 20 years) to get current benefit. = $203,000

To make it more exact, you could get a quote for an annuity rate
available to you now, if you were retiring now. I am using 4% (about
the right rate for the UK for a 65 year old man, in good health,
inflation protected up to 2.5%, 50% spousal benefit). I am also
assuming that that won't change between now and then (it's very likely
to fall-- annuitants live longer than average, and longevity is
growing at a shocking pace at the moment).