January 14, 2005

#173: Krug's own retirement plan is like that...


In The British Invasion (01/14/05) Paul Krugman comes up with a scare story of his own based on the UK's experience with private accounts. Here is his summary taken from one source:

"Many Britons were sold badly designed retirement plans on false pretenses. Companies guilty of "mis-selling" were eventually forced to pay about $20 billion in compensation. Fraud aside, the fees paid to financial managers have been a major problem: "Reductions in yield resulting from providers' charges," the Pensions Commission says, "can absorb 20-30 percent of an individual's pension savings."

American privatizers extol the virtues of personal choice, and often accuse skeptics of being elitists who believe that the government makes better choices than individuals. Yet when one brings up Britain's experience, their story suddenly changes: they promise to hold costs down by tightly restricting the investments individuals can make, and by carefully regulating the money managers. So much for trusting the people."

If there really is a problem here (we'd like to look into the UK system more before commenting) it seems to be a combination of fraud and fee greed. But Krugman admits that the American initiative has an answer for both problems by restricting investments to an approved list of low cost funds. He poo-poos that as not "trusting the people." But not trusting them to do what? Pick individual stocks? The evidence is that even experts have a tough time doing that–hence the rapid growth of index funds. Furthermore, the nation's teachers and college professors including Paul Krugman have a retirement plan at TIAA-Cref that is set up exactly along the lines Krugman is now knocking for lack of choice. You can read about it here. But the following table gives a quick overview of Krugman's Choice along with associated fees. It's certainly a broad and sensible choice. We can't vouch for the fees because we didn't calculate them ourselves, but they seem very reasonable as well (nothing over 0.5 %). So tell us, PK, if a program like this is good enough for you, why can't all workers have a piece of the action if they want it?

Krugman's Choice expense charges chart

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at January 14, 2005 10:26 AM
Weblog by John Weidner