COUNTERCOLUMN: All Your Bias Are Belong to Us

It's gonna be a long, stupid year.

Here are just a few of the dumb ideas, misconceptions, and foaming-at-the-mouth from Kevin Drum's message board:

The reason the financial experts won't talk about this is that the fund managers will be charging 1% to 2% of the total amount of invested money each year as the fee to manage it.

Misconception: The writer is relying statistics for the average retail money manager.

The problem is that these expense figures are wildly out of line with those that are available to institutions.

The "C" fund - the U.S. large cap stock fund within the Thrift Savings Program, had an expense ratio of about 0.06 percent, or six one hundredths of one percent.

So this guy's overstating the costs of the program by a factor of twenty.

Even the more expensive asset classes - the international stocks or small cap stocks, let's say, could be managed by institutions for 20-50 basis points or so.

So this argument is a flaming straw man.

But you'll hear it screeched over and over again, no doubt.


More:

At the macroeconomic level, aren't surpluses in the current social security trust fund and contibutions to private retirement plans both elements of national savings? If they are, the argument about "savings" is economically specious.

No, surpluses in the current social security trust fund cannot be considered 'national savings.' The entire surplus goes into the general fund, where it is then spent by congress. The treasury then sells a bond to the SSA. The social security surplus, as currently practiced, does not represent national savings. Every dollar represents an increase in the national DEBT.

Unless the law is changed to allow privatization in SOME form, there is no fix. Congress HAS to spend the money, because there is simply nothing else they can do with it, other than take it out of circulation.

This scheme breaks Social Security. Breaks it so good that no one will realize it's been broke until it's far too late to fix. Social Security works because of survivorship. Everyone pays in, but not everyone lives to collect.

You don't think the SSA has heard of actuarial tables?

What happens to the invested worker who's last day at work is one-day after the stock market tanks and loses perhaps 30% to 40% of its value. (It's happened before, it will happen again -- although last perfromance is no guarantee of future returns).

Let's say the worker enters the work force at 18 and retires at 65, with a portion of his portfolio invested in equities the whole time. That's a 47 year time horizon.
Has there ever been a 40 year period in history in which equities have failed to outperform treasuries?

No.

A 30 year period? No.

This commenter ignores the risk of underperformance, and ignores the risk premium altogether.

Which is less risky: a pure treasury portfolio, or a mix of treasuries and equities? Well, equities are riskier. But Modern Portfolio Theory demonstrated back in the 1950s that adding a mix of equities to a treasury portfolio actually DECREASES volatility.

What happens to a guy who retires at the end of a secular bear market in bonds?

The author makes no mention of the possibility--he just assumes the risk as if it isn't there.

1) How much of GDP growth can be attributed to population growth?

2) How much of stock market growth is attributed to population growth?

Excellent questions. Will stocks continue to expand if population levels off?

Also, how much is attributable to inflation? (I seem to remember very little--inflation doesn't give a boost to stock prices. It's in Jason Zweig's edition of "The Intelligent Investor" somewhere. I don't have it handy just now.)

What I want to know is, what problem are we trying to solve here? On NPR this morning I heard talk of a $2 trillion deficit over the next 75 years. The Social Security Act was signed in 1935, so we're talking about projections farther in the future than the whole history of SS to this point. Are they kidding with this? Bush and his cronies care about 75 years from now when he doesn't care about today's deficit? No, that doesn't make sense.

Well, we actually know quite a bit, because the next 75 years' worth of retirees have already been born. We know the birth rates in previous years. We don't know their mortality rates, but we can hazard a pretty fair guess, and we can assume that medical technology and nutrition is going to improve, expanding their lives.

We also know the number of US born workers for the next 65-70 years, because they've been born already, too. So it's an easy matter to compare the number of workers with the number of retirees out over the next 65 years, at least.

Season with immigrants to taste.

As noted upthread, the tradeoff -- as in pretty much any investment -- is between risk and return. Currently, SS funds are invested very safely and yield relatively low returns. Privatizing some portion of it would boost the AVERAGE long-term yield, but at the cost of increased risk, and because of that risk there would be some long-term losers.

Again...Modern Portfolio Theory demonstrates that a mix of equities and income investments are LESS risky at many points along the risk-return continuum than an all-bond portfolio, with no corresponding decrease in return at some points.

You can tweak this to improve returns, or you can tweak it to reduce risk. Institutional money managers do it all the time. You will not find a major pension fund invested 100% in treasuries right now, because financial pros know this.

Put simply, with privatization, some people will be wiped out. And the greater the degree of privatization, the more people will be wiped out. At the extreme -- as was the case before the advent of Social Security -- an entire generation can be wiped out. This is what happened in the late 20s and 30s, and it's why we have Social Security in the first place.

How many people does this guy think owned stock in 1929? How is it that equates to an entire generation?

Doesn't he think 90% margin lending (impossible today) may have something to do with
the extent of the crash?

Since incomes are now more volatile than ever before, bankruptcies are a lot more common. 401(k)'s, IRA's, and 403(b)'s are all considered in bankruptcy to pay your creditors. Your Social Security is protected from that.

Suppose you or a family member has a serious illness that depletes all your income and savings, throwing you into bankruptcy. Today you still have SS to retire on at a minimum.

The other two main causes of bankruptcy are unemployment and divorce.

Can your ex-spouse take your personal retirement account the way they can your 401(k)? They can't touch your SS at this time.

Wrong on more than one count. 401(k)s, 403(b)s, and TSP balances are NOT considered in bankruptcy to pay off creditors. IRAs have somewhat less protection, depending on your state. (If you are a frequent lawsuit target, or expecting a judgement against you, you may not want to roll your balances over after leaving your old employer.)

Moreover, your ex-spouse does have a claim on social security earnings after 10 years of marriage. (9 years, 364 days and she's out of luck, though.)

It's probably worth asking who will be in charge of these "private accounts". The money will probably end up being diverted to large Wall Street firms, naturally large Republican donors, who will promptly blow it.

Huh? Why?

but, but what about all the brokerage fees made by churning sheople accounts...and the yachts, oh the yachts.

It's kinda tough to churn accounts in an index fund with an expense ratio of 0.06 percent on US large caps, and a benchmark to keep the bastards honest. This guy's been watching too many movies.

However, under the current system the payout is level across the board. Same for everyone. This will not be the case when private accounts are enacted. So, a person would have the right to say that the government forced them to invest, but their return was inequitable, prompting, IMO, justifiable lawsuits.

Don't worry. Private SS accounts along a TSP model won't have any trouble beating self-directed 401(k)s and IRAs, by 1-2 percentage points a year, MINUMUM. (You can do your own research on Watson Wyatt.com).

American goods abroad are obtaining a patina reserved for despised empires.

Fucking idiot.


Splash, out

Jason