An Online Simulator for Testing Reform Options
Our Social Security Simulator: An objective, neutral, bipartisan tool for understanding Social Security issues quickly and accurately.
This page displays the calculations the Simulator makes in order to work out an estimated year-by-year real ROI (Return on Investment) for investments in a market-breadth index fund.
The simple way to estimate 5% real return on stocks, of course, is on a straight-line basis, just like interest payments on a savings account. The stock market, though, is anything but simple. The Simulator includes a built-in stock market simulation (see Chart 4). This simulation produces an up-and-down series of real ROI estimates, whose ultimate value is equivalent to a straight line 5% real ROI investment.
(The rate doesn't have to be 5.0%. It could be 6.0%. Or 4.5%. Your choice, see the Assumptions page.)
ROI and IRR, Short and Long. The ROI Display lets you examine two sets of numbers - ROI (Return on Investment) and IRR (Internal Rate of Return). You can switch back and forth between them by clicking the "Switch to IRR" and the "Switch to ROI" buttons. You can also switch back and forth between short version displays - the first five years and the last five - and long version displays - 2002 through 2075.
ROI Series. If you study the ROI display carefully, you'll see a steadily growing GDP. You'll see an estimated set of numbers for the Market Capitalization to GDP ratio. They're only guesses, of course, but they're consistent with past history. You'll see an estimated Dividends to GDP ratio. And you'll see an estimated Index Fund Lag Factor. As you trace the calculations, you'll see that the final result, the year-by-year Real ROI series, flows directly out of these four series - the GDP, Market Cap/GDP, Div/GDP, and Index Fund Lag Factor series.
IRR Series. The IRR Display shows you what happens when the Real ROI percentages are applied to a steady flow of annual deposits. For convenience, we used a small percentage of Taxable Payroll as the illustration, but any equivalent series (e.g. a 75 year salary growth series, with a constant percentage deposited) would produce identical results. Year by year stock values go up and down, but there is a 2075 result which we view as the "end."
The second set of numbers on the IRR page uses exactly the same string of year-by-year deposits as the first set, but grows them at a steady rate each year, plus inflation, reaching an "end" value in 2075.
Result? As you will notice, even though one set of calculations bounces about wildly, while the other proceeds with lockstep monotony, the two separate "end values" for 2075 are virtually identical. And that, of course, is the point. The "bouncy" series represents the same long-run Real ROI as the "level" series.
We have experimented with other methods for calculating Real ROI. Their overall results vary significantly from one another, we've found. We've settled on the yearly deposit IRR method for calculating the Real ROI series, because the yearly deposit method most closely resembles the way in which an index fund-based PRA investment would grow in value from one year to the next.
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