Friday, December 17, 2004

Walnut Shells, A Pea, and Paul

The Fly Under the Bridge Academy is highly amused to have debunked a Paul Krugman column the day before it was published. Watch very carefully as the shells move before your eyes:

Privatization dissipates a large fraction of workers' contributions on fees to investment companies.

....These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings.

....Advocates insist that a privatized U.S. system can keep expenses much lower. It's true that costs will be low if investments are restricted to low-overhead index funds....

Which is also a variation on [former Seattle Mariner broadcaster Ken] Levine's Law: A lead-off walk always comes around to score...unless it doesn't.

Management fees will always be high...unless we follow best practice investing strategy.

Say, like the federal government's own Thrift Saving Plan which the CBO estimates to cost $25 per participant per year. Or those of index mutual funds such as Vanguard or T Rowe Price with their less than 1% annual fees.

And of course, no Paul Krugman column is complete without a brazen whopper:

So the Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms.

We guess that "works" is being stretched, rubber band-like, here to describe a retirement system about which Paul Krugman himself in his 2001 book Fuzzy Math, said:

...if economic growth should slow and, worse yet, if the birth rate should drop, we would have a serious problem. When the big generation retired, there would be relatively few workers paying in and a lot of retirees drawing benefits. Something would have to give: benefits would have to be cut, taxes increased, or both.

And sure enough, that's what happened. ....If Social Security were to be run on its traditional pay-as-you-go basis, working-age Americans would stagger under the burden of caring for their elders.

It is true that Krugman then went off to la la land waxing rhapsodic about the "trust fund" assets that supposedly eliminated the staggering burden on the work force until several years in the future. Conveniently forgetting Accounting 101, which teaches that an asset and a liability of exactly equal amounts held by the same entity, nets to $ 0.

But shortly thereafter, Krugman admits that the system he now claims "works" has run up a huge but hidden debt, of over $ 10 trillion. And he reiterates:

The important point is that Social Security is still mainly unfunded....the Social Security surplus is not a true surplus.

....the Social Security surplus was a matter of putting money into the government's left pocket even as a larger sum was being extracted from the right pocket.

A retirement system that works. We surmise, because it's also possible for the government to put money into its right pocket by extracting it from its left pocket.

No comments: