Economist defends his point of view on postponing social security and paying off mortgages

Laurence Kotlikoff on market timing: “You don’t time the market for returns. You time the market for the risk.

Photograph by Jared Charney

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Economist Laurence Kotlikoff has spent the past 28 years urging most Americans to wait as long as possible to claim Social Security, which puts him in the crosshairs of those who think the government program is going to run out of money.

The Boston University professor is steadfast despite criticism. For starters, he doesn’t believe Social Security will be taken away because the elderly are such a strong political force. And even if Social Security was cut, say by 25%, Kotlikoff says the numbers still support the wait to collect.

“The lifetime benefit gain while waiting could drop from 40% to 25%, but it’s still a big gain,” he says.

Barron recently published an article in which Kotlikoff discussed his take on social security and many other topics. Kotlikoff attacked the approach of traditional financial planners, claiming that they are too focused on building investment portfolios when their primary goal should be to ensure clients a constant income throughout their lives.

The article drew more than 200 comments, many of which were critical of Kotlikoff. Readers were dismayed by the economist’s admission that he pulled out of the stock market at the start of the pandemic last year, missing the dramatic rebound in stock prices that occurred after the government federal government injected trillions into the economy.

In his most recent interview, Kotlikoff defended his position to take his personal money out of stocks. “What financial theory says, and all these critics should know, as your risk increases, you should invest less in risky assets,” he says. “I am an economist and I had never seen an economy stuck before the pandemic. “

When asked if he was guilty of market timing, Kotlikoff replied, “You don’t time the market for returns. You time the market for the risk. We were clearly in a very risky position.

Other readers disagreed with Kotlikoff’s claim that it makes sense for many people to withdraw money from their individual retirement accounts to pay off mortgage debt in an era of record mortgage rates. Readers noted that the stock market saw double-digit gains, earning them far more than they would save by paying off their mortgages.

Kotlikoff responded this week: “The market has performed well over the past decade. But there is no guarantee. If stock prices were so secure, we wouldn’t see interest rates so low.

Still, Kotlikoff says the decision to pay off a mortgage depends heavily on personal factors. People should only pay off mortgage debt after paying off the higher interest debt on credit cards and other loans. He said consumers need to keep a certain amount of cash to deal with emergencies. Those in a high tax bracket probably shouldn’t be taking extra money out of a tax-deferred account and paying extra taxes. Likewise, he said people with ultra-low mortgage rates like 2% have less incentive to pay off their mortgage.

But for homeowners who are still paying mortgage rates of 3% or 3.5% at a time when Treasuries are yielding less than 2%, Kotlikoff says “this is a pure arbitrage opportunity.”

He says it’s not fair to compare the potential market returns with the guaranteed return on your mortgage prepayment.

“We know that historically, for 30-year holding periods, stocks have performed well,” he says. “But not everyone has a 30-year detention period. If stocks fall by half, some people will panic sell low and suffer huge losses. “

The market has performed well over the past decade. But there is no guarantee. If stock prices were so secure, we wouldn’t see interest rates so low.

– Laurence Kotlikoff on caution

Some readers have questioned Kotlikoff’s view that no one should go into debt to pay for their education. Without debt, one reader noted, many Americans cannot go to college.

Kotlikoff, who has a doctorate in economics, agrees that college is a good investment for a lot of people, but he’s troubled that large numbers of Americans are starting college, taking on heavy debt, and not finishing it.

“There are colleges with a lot of different prices,” he says. “People have to shop. He cited a study that found that going to an elite, high-priced college for an education doesn’t make a big difference in career earnings.

But the biggest problem Barron readers had with Kotlikoff was his thorough Social Security support. When asked why Social Security is so important, Kotlikoff replied, “I think people should be forced to save.

Kotlikoff said he and economist Jeffrey Sachs long ago proposed a new type of national pension system for the United States that would save workers more money than Social Security would invest in l money in zero cost index funds, but would still have guaranteed benefits.

But for now, he thinks Social Security is the best deal. Social security is adjusted for inflation and its price is more generous than private annuities. Benefits increase by 8% for each year workers wait past full retirement age to claim social security.

“This is a secure and huge retirement that the government is offering,” he said. “It’s like a bag of gold coins delivered to the front door. It really is obvious.

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