Monday, April 18, 2005

A Statement I'm 1,000-Percent Convinced is Bu**sh**

by Tom Bozzo

"I'm 1,000-percent convinced of this: The president cares the most about this $10-an-hour person," said Allan B. Hubbard, director of the White House National Economic Council.
From the Washington Post, via MaxSpeak.
Yeah, well since it's impossible to be 1,000 percent convinced of anything.

How about the full quotation too? ""I'm 1,000-percent convinced of this: The president cares the most about this $10-an-hour person," said Allan B. Hubbard, director of the White House National Economic Council. "And what he gets most irritated by is when it is suggested, 'Oh the $10-an-hour person isn't sophisticated enough to deal with a personal retirement account.' ""
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[Third time's the charm... previous renditions deleted for typos/omissions.]

Since you mentioned it, Bryan, I don't believe that disparagement of the $10-an-hour person's investing acumen is what gets President Bush "most irritated," either. More than by OBL, Iranian and/or North Korean nukes, Israel doing its own thing on settlements, the quality of Washington Nationals baseball?

I think the latter portion of the Hubbard quote is a straw man argument in any event.
Whereas I fear that Hubbard may be correct.

(Otoh, I assume a $20K/year person is fully sophisticated enough to understand the implications of a PRA if they are presented to her:

Your $800/year will be charged $25-40 [3.125-5%] in fees, plus

the Administration will reduce your benefits by 2.7% [$21.60], so

your $725-$750 must return 6-10% just to get back to where you were and

the return of the market for the past four-plus years is negative so

Good Luck, Sucker.
Oops. Forgot to close the paren:



By the way, at the end of this, you are required to buy an annuity, which will cost you probably 6% of your portfolio, so that's another bit of return you have to find somewhere.
Tom, I think he's referring to the Social Security debate, not all current issues facing the Pres. Besides, the $10 an hour person is the least likely person to have additional savings at retirement and would likely gain the most from a personal accounts system (that is, if additional gains can be made).

Ken, if you invest your money for five years, of course you have a chance of getting nailed. If you invest for 30 years, there is essentially zero chance of losing money in the market. If you aren't in the market, you are missing the boat.
Bryan: I'm not sure I buy what Hubbard is selling, even confined to the Social Security privatization issue. That is, since the events on the President's itinerary seem to be getting more, rather than less, controlled, I'd guess that what's irritating him the most is that people aren't buying what he's selling.

It's also not true that low wage earners have the most to gain from privatization under the Bush plan/non-plan. Remember the Texas alternative plans, which one of your commenters was pushing as a privatization model a while back? The GAO found that their benefits were more likely to benefit high earners, relative to traditional Social Security, than low earners. (A post on the subject is forthcoming, but see here for a PDF of the report.)

I also think you're missing a key point of Ken's comment, as well as this previous post of mine. It's not sufficient under the likely Bush plan to generate a positive return, as would be the case with conventional savings. You have to generate enough of a return to clear the guaranteed benefit offset ("clawback"), administrative expenses, and annuitization costs. Administrative expenses in particular are likely to be very high relative to returns for low wage earners' small accounts, unless the plan somehow subsidizes them. Of course, any such subsidies (not to mention other transition costs) have to be paid by somebody, too. In any event, there's no guarantee of coming out ahead under privatization.

If you value "ownership" (with the plan's likely restrictions) above other considerations, you're entitled to that preference. But you shouldn't be surprised that people are motivated by pecuniary incentives, or as Ken puts it, can understand the implications of PRAs when they're spelled out.
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