No ‘Fool’s Paradise’
Krugman lies about personal accounts for Social Security.
If the liberal establishment is so sure that reforming Social Security with personal accounts is such a terrible idea, then why do they have to lie about it?
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');}// --></SCRIPT></TD></TR></TBODY></TABLE>Consider Paul Krugman’s
latest New York Times column. It’s designed to scare his readers into believing that “privatization,” as he calls it, “dissipates a large fraction of workers’ contributions on fees to investment companies” and “leaves many retirees in poverty.” To prove this, he offers a smorgasbord of deceptions, errors, distortions, and misquotations about the way reform with personal accounts has failed — or so he claims — in other countries.
Krugman’s primary target is Chile — which became in 1981 the first country to reform its national pension system with personal accounts. Krugman says,
More than 99 percent of Social Security’s revenues go toward benefits, and less than 1 percent for overhead. In Chile’s system, management fees are around 20 times as high.
First, Krugman is in error to call the charges “management fees.” About a third of the fees are not management fees at all, but rather premiums for life and disability insurance coverage that are an integral benefit of Chile’s system.
Second, fees should be seen in terms of assets under management — not as a fraction of revenues. According to Chilean economist Salvador Valdes-Prieto, fees in Chile as a fraction of assets under management are about sixty-five one-hundredths of 1 percent — lower than the average mutual fund fee in the United States.
Third, it’s laughable for a professional economist like Krugman to suggest that fees charged by the tiny, over-regulated Chilean financial services industry would in any way represent the best we can do in the United States. Here, large, highly developed, competitive, and relatively unregulated markets create enormous economies of scale.
Most Social Security reform proposals advocate the use of ultra-low-cost index funds, of the type employed by the Thrift Savings Plan — the 401(k) plan for federal employees. Krugman, however, has a lie all ready to counter that reality. He says,
It’s true that costs will be low if investments are restricted to low-overhead index funds — that is, if government officials, not individuals, make the investment decisions … And if there are rules restricting workers to low-expense investments, investment industry lobbyists will try to get those rules overturned.
I know from personal experience that every word of this is a lie. I used to be an executive of Barclays Global Investors, the firm that has run all the index funds for the Thrift Savings Plan since the program was first started in the 1980s. First, I can tell you that no government officials made any investment decisions whatsoever.
My company ran the funds — and every individual federal employee decided for himself or herself which of the funds to invest in.
I can also assure you there was no lobbying to raise fees — we didn’t have time to lobby. Our contract came up for re-bid every 2 years, so we were kept plenty busy competing with other index-fund managers to offer the Thrift Savings Plan suicidally low management fees. In the last bidding cycle while I was still at Barclays, we beat our major competitor — State Street Global Advisors — by committing to manage an S&P 500 index fund for a fee of 4.5 one-thousandths of 1 percent per year. To put that in perspective, the Vanguard Index 500 fund, renowned for its low fees, charges 18 one-hundredths of 1 percent — which is
40 times more than we charged the federal government.
Here’s another Krugman lie about the record of reform in Chile. He says,
as a Federal Reserve study puts it, the Chilean government must ‘provide subsidies for workers failing to accumulate enough capital to provide a minimum pension.’ In other words, privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them.
Krugman makes it sound as though the Chilean system has failed, and the government had to bail it out. In fact, a safety net for the neediest workers was an intentional feature of Chile’s reform from day one. So nobody “stepped back in” — they were always “in.” And the use of the safety net is actually minimal. According to
Senate testimony by Jacobo Rodríguez of the International Center for Pension Reform,
As of March 2002, the government had supplemented 33,029 pensions, including 11,759 old-age pensions, out of over 400,000 pensions. ... the cost to the government of supplementing these pensions has been about $33 million.
In fact, the Chilean safety net only applies to workers with 20 or more years of participation in the system. Considering that the system is only 23 years old this year, there just aren’t that many workers who are even eligible. And considering that the reformed system provides adequate benefits to retired workers based on only a 4 percent real return from invested assets — and that the real return since inception has been about 10 percent — we’re not going to find a lot of “dire poverty.”
So what about that “Federal Reserve study”? Turns out there’s no such thing. There’s only
a 2003 symposium paper by Stephen Kay, a researcher at the Atlanta Fed, whom a source close to the situation described to me as “a young leftie economist who is an ideologue against private systems.” Kay’s paper states right on the cover that “The ideas expressed in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.” It’s deceptive of Krugman to suggest that the paper has the imprimatur of the Federal Reserve System.
And Krugman elided the first half of the sentence he quoted from the paper, which makes it clear that Kay is asserting only that government supplements have “elevated in part” Chile’s long-term fiscal costs of reform.
Turning to the other half of the globe, Krugman tries the same trick with the British equivalent of Social Security. He writes that Britain’s
Pensions Commission warns that those who think Mrs. Thatcher’s privatization solved the pension problem are living in a ‘fool’s paradise.’ A lot of additional government spending will be required to avoid the return of widespread poverty among the elderly — a problem that Britain, like the U.S., thought it had solved.
This is a flat-out lie. The
report of Britain’s Pension Commission “warns” of nothing of the sort. The expression “fool’s paradise” is in reference to “irrational equity markets and delayed appreciation of life expectancy increases” that allowed many British
corporate pension plans to “avoid necessary adjustments until the late 1990s.” It has nothing to do with “Mrs. Thatcher’s privatization” — and it’s hardly a “warning,” considering that it describes “necessary adjustments” as having been made during the previous decade.
So what is Krugman’s solution to rescuing Social Security — to keep government from having to “step back in” like Chile’s supposedly did to cure “dire poverty” — and to truly solve a problem that Britain supposedly only “thought it had solved”? Raise taxes, of course. In
a Times column two weeks ago Krugman recommended raising taxes by half a percent of GDP, in order to shore up Social Security “into the 22nd century, with no change in benefits.”
Krugman makes the tax increase sound small by expressing it as a percentage of GDP. But in language that working people can understand, his recommendation is the same thing as raising the Social Security taxes that workers pay by about 25 percent, according to
a June 2004 Congressional Budget Office report.
And he never mentions that raising taxes is a fix that we’ve tried before, right here in the U. S. of A. That fix failed. Because the Social Security system is fundamentally insolvent over the long term, and gets worse every year, raising taxes only helps for a short time. Remember, the system was on the brink in the early 1980s, and we shored it up by raising taxes. Now it’s on the brink again — and if we shore it up by raising taxes, we’ll just be back on the brink again in another 20 years. Unless we raise taxes again, and again, and again.
And that’s no “fool’s paradise.” That’s hell on earth.
