Yesterday, I offered a Los Angeles Times story that showed how poorly Nobel prize winners in economics handle their retirement money – so why is President Bush persuaded the average Jane or Joe would do better?
Michael Axelrod: ‘There is no Nobel Prize in economics. There is the Bank of Sweden Prize in Economics in Honor of Alfred Nobel. Nobel did not create a prize for economics (or mathematics). The Bank of Sweden decided to create their own prize. In 1969 they cleverly attached Nobel’s name thinking the press would start calling their prize ‘The Nobel Prize.’ While it’s true that they got the Nobel Foundation to administer the prize for them, we don’t know to what extent they influence the selection of the winner.’
☞ Interesting. And yet with regard to the integrity of the Nobel prize in economics, I somehow sleep like a baby. Or should we assume the Swedes have some ulterior motive? (‘Give it to Markowitz! Give it to Markowitz!’)
Tom H., CPA, CFP: ‘Are the ‘smartest among us’ really an appropriate argument against social security reform? After all, academia (Nobel laureates and the faculty and staff at Harvard) have never had to sell a product or service for a profit. This rhetoric is appalling to me. My experience as a CPA with a Manufacturing and Retirement Plan audit background shows anecdotal evidence that sawmill workers in small towns in Alabama understand the value of their 401(k)’s and the value of an employer match (free money as you call it). And that beverage distributor truck drivers in Atlanta don’t fail to make an investment election [and thus don’t leave their money sitting idly in low-interest money market accounts]. Most defined contribution plans provide education opportunities, or a professional management option, or at least a model portfolio.’
☞ I guess there are two pieces to this.
One is shoring up the system. The President’s proposed private accounts, all agree, do nothing to shore up the system. Indeed, they divert trillions from the system, which we would have to borrow to make up. So if strengthening Social Security is the goal, private accounts won’t do it.
The other piece is getting people to save more, and in ways that will earn a higher return. The LA Times story was, I thought, yet more proof that good people often aren’t good with money.
The sawmill workers and beverage truck drivers Tom describes may all pay their credit card bills on time, avoiding the 18% interest and $29 late fees – but more than half of those who have credit cards DO pay obscene non-deductible rates and fees.
His folks may be smart enough to avoid the high-expense mutual funds and annuities that, on average, do so much worse than average because of the drag of those high expenses – but a majority of folks still buy the high-expense products.
His folks may have the native common sense to buy stocks when they’re cheap (and maybe even sell them when they get nutty) – but an awful lot of folks sell when they should be buying and vice versa.
And if people think they’re accumulating large private accounts, might they not be inclined to save less in their IRAs, Keoghs and 401(k)’s? Only then to find that most of what they’ve saved in their private accounts, if not all of it, is snatched right back away from them in the trade-off they’ve accepted: lower benefits.
The last aspect of this privatization debate that seems often to be neglected is what I think of as the ‘free lunch’ part. Can it really be so simple as that long-term bond holders should all switch to equities to get a higher return? Is it possible they could all do better – and with no troubling side-effects? Come to think of it, why not just have everyone give Warren Buffett their money to manage – could we not all then expect 23% a year?
The truth is, at least as I imagine it, if everyone shunned boring, safe, low-interest Treasury securities – of which we currently have about $8 trillion outstanding – Uncle Sam would have to raise the pay-out on such bonds until it were so attractive that people DID buy them. (Alternatively, Uncle Sam would have to declare bankruptcy.)
This would add yet tens of billions of dollars a year more to our deficit. And it would also raise the general level of interest rates, hurting consumers and business.
So I’m not sure a massive shift to equities is really the magic bullet some imagine it would be (though it could be a bonanza for Wall Street).
Most lunches are not free.
Joel Margolis: ‘The rate of return you quoted on the hybrids sounds good to you (and me) because we understand rates of return. Most Americans don’t and, unfortunately, demand incredibly high rates of return on doing these things (e.g., see the scant proportion of Americans who are willing to pay more for long-lasting light bulbs). The discount rate that Americans implicitly assume for their actions is incredibly high.’
☞ Quite true. And since so many put their purchases on perpetual 18% credit balances, a high discount rate is not entirely irrational!
Andrew Zachary: ‘The clip in today’s column about hybrid cars overloooks an additional cost: batteries. No one knows how frequently we will have to replace the storage batteries in a hybrid car. The best estimate I’ve heard is once every 6 years at a cost of $2,000 to $3,000. If this number is correct, then there is no savings, and possibly even a small deficit.’
☞ Oops. One of you wrote in to say his hybrid has a 7-year warranty on the battery . . . so I guess the trick would be to have it need replacing after about six years? Clearly, I am out of my depth here. I drive a ’97 Grand Cherokee, bought used, because I drive it about 1,000 miles a year. Were I to trade it for a Prius, the new owner would drive it ten or twenty times as far, wasting loads of gas; and I would be taking a Prius (there’s a waiting list) from someone who could achieve 20 times the energy savings with it that I could. But oh, if I were a cabdriver!
Quote of the Day
October. This is one of the singularly most dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September.~Mark Twain
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