Friday, December 17, 2004

What Krugman forgot to mention about the cost of private accounts in Social Security.

Paul Krugman remains on leave from his book leave to continue waging war against private investments in Social Security through his column.

Alas, in today's installment he can do no better than trot out the tired old bogey man of "high fees", with the tired old examples of Chile (always a bogey man for those on the left) and Britain. Hey, from my own clip files I see that these very same talking points are at least ten years old -- from back when the Advisory Commission of 1994 was examining private investments in Social Security. Golly, for the money it's paying him can't the Times get anything more timely, or more convincing, from the great economist?

Anyway, three observations...

[] First: Britain's own Tim Worstall puts it to Krugman for grossly misrepresenting the situation in the British retirement system.

[] Second: While I don't know if Krugman is any more reliable about Chile, I'd anyhow suggest that regarding US Social Security reform the situation in the US is rather more relevant. After all, it's not like we don't have any existing private investment programs operating in the US! What's the situation here?

I looked things up when this canard was flying around a couple years ago, it was like this...

* The Federal Thrift Savings Plan was managing private accounts with a 0.1% expense rate -- good enough for government employees!

* Vanguard was charging 0.2% for index mutual funds -- and I know that Fidelity is charging less than Vanguard now.

* The mean administrative cost for Standard & Poor's 500 Index mutual funds was 0.4% .

* The average administrative cost for private-sector, multi-employer defined contribution plans was 0.8%, according to the Department of Labor.

And the mere 1% that Krugman brags about Social Security charging for running a big checkbook, while managing no real assets, was higher than all of them.

By the way, rather than cherry pick a couple examples that might even be bogus, wouldn't it be sounder for Krugman to generally survey the experience of the 20-odd nations that have established some version of personal social security accounts so far?

I mean, why not mention how Sweden today is happily living with 2.5% private investment accounts in its social security plan?

Possibly because it might give the impression that Swedish social policy is too right-wing for US Democrats?

[] Third: While Krugman shows such concern over how high expenses might reduce the returns to workers in private Social Security accounts, he somehow fails to mention the outright negative returns for today's young workers that are guaranteed by Social Security.

The Social Security Administration's actuaries say every annual cohort retiring after 2000 will get less back from Social Security than they put in, with those entering the work force in 1994, ten years ago, getting back as little as a 50% -- taking a 50% loss.

Moreover, if the current paygo structure stays in place then the Iron Laws of Arithmetic will result in them getting back as little as 35%, a 65% loss!

Krugman warns that private accounts are expected to earn an average of only about 4%, and after expenses positive returns will be even less ... that's bad!

But bad compared to what? Compared to a status quo that gives outright negative returns to everyone, up to minus 65% ... that's good???

Hey, if he's so concerned about getting workers a decent return on contributions, why didn't he note this? ;-)

Yes, markets are risky and brokers are greedy. But to guarantee negative returns over a period as long as 40 years, no market can do that -- that takes a government.

Update: It seems Krugman made a number of even bigger mistakes and misrepresentations, that are happily pointed out by his stalking nemesis.