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:
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 TRUTH SQUAD
"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."
[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 | TrackBackFidelty has index funds down at 10 basis points. That's less than half the lowest priced fund on your chart. I just gotta wonder where people are finding those kinds of fees.
What I suspect, though, is they are simply adding up the cumulative fees and acting as though there was no growth one's account. For instance, one of these funds with a 0.3% fee would add up to 15% over 50 years. Of course, you wouldn't have actually lost 15% of your money to fees due to time averaging and compound interest but it's hard to believe Krugman would know that.
Posted by: Annoying Old Guy at January 16, 2005 08:20 PMUnfortunately, I was unable to respond to KTS retraction and question in #171 "A Ponzi-Analysis" within the ten day period, as I hadn't discovered it until today (and was unaware of the ten day limit). I could email, but I would like to respond here, since this entry directly relates.
KTS-
Strange that you should quibble about semantics; whether or not Krugman's article at bepress was an expanded or "long" version of the NY Times op-ed piece. Wouldn't it have been much more productive and relevant to the issue to address the problems I and others have shown with the "Truth Squad" analysis? You have not, yet I am asked to waste my time on a mostly irrelevant matter. Instead of pointing out all the differences, I strongly encourage people to carefully read the two articles. I think they will find both enlightening and well worthwhile, and not at all as redundant as claimed.
O.K., I'm a sucker for a challenge--so here is a teaser from the bepress PDF you won't find in Krugman's January 4, 2005 NY Times article that pierces the heart of the "Truth Squad" argument at top:
"But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accent the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that's meaningless, but when--in 2018 or later--benefits start to exceed the payroll tax, why, that's a crisis. Huh?"
PS--The above excerpt is from Part I of the PDF, which, like the Times piece, deals with the SS Trust Fund. Parts II and III discuss the problems with privatization, which is not covered in the NY Times article. Again, very enlightening, well worthwhile, and a fairly quick read.
Posted by: bugs at January 17, 2005 01:15 PM
Krugman is right to point out the hypocrisy of this administration's catch phrases: "trusting people", "choice", and "ownership". Their words, not his. The truth is government can't trust people not to gamble their retirement away on high-risk ventures. (Just stop by a Gamblers Anonymous meeting sometime.) Nor is the financial community above reproach. (Who can forget all the insider trading and other recent investment firm fiascos, or the S&L deregulation boondoggle that resulted in a huge federal bailout with our tax dollars?)
It was proponents, not Krugman, who lauded other countries privatization plans. Yet not one of the countries that has gone that route stands up under close scrutiny as a success. Now Krugman is attacked for pointing this out. Talk about shooting the messenger!
The "Truth Squad", referring to Krugman's supplemental retirement fund, asks, "Why can't all workers have it like that?" Gee, I thought we already did. What about Keogh accounts, 401K's, IRA's? Yes, they are supplemental retirments accounts, just like PK's, that are already subsidized by government and industry. And, we do already have a personal choice in how to invest that money. But Social Security, besides being a highly successful, well-run government program, provides just what it says: security. I know that if the stock market tanks, as has happened before, I can trust that the U.S. government will still stand.
The fact is, by privatizing, either we will pay higher taxes now to support the elderly while we take our FICA* and invest it in the stock market, or, as proposed, we will leave it to our kids, and they will be saddled with not only that debt and its interest, but the full cost of their own retirement. So, the "choice" comes down to this: either we are responsible and bear the costs (higher taxes) ourselves, or we are irresponsible and allow our kids to bear the brunt of the burden. Or, we could be make some minor adjustments to Social Security in the next decade, no greater than those made in past decades, sustain solvency far into the future, continue to enjoy a good thing and still have supplemental retirement accounts to invest in, allowing us to live comfortably well long after retiring. The choice is really not difficult at all.
* Only two-thirds of your FICA withholdings goes towards retirement; the other third is for disability and survivors benefits, which would continue to be withheld, as this administration is not proposing to change those programs.
