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December 17, 2004

Paul Krugman: Lies, Evasions or Simple Ignorance?

Sad to see a man who is and was a well respected academic economist making the following sorts of statements:

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.

Simply not true. None of it.
The UK has a pay as you go pension system exactly comparable to Social Security. The only difference is that we do not pretend to have a trust fund or a lock box. Current contributions are paid into the General Fund and current benefits are paid out of the same General Fund. (I should note that it is a basic rule of UK Govt accounts that we do not use hypothecation, do not allocate the revenues from a specific tax to a specific cause or benefit.) It has always been clear, since the system started in 1909 (or was it 1911, David Lloyd-George anyway) that it was a pay as you go system.
The tax paid is called National Insurance and it is, just as with SS, a regressive tax on earnings with an upper limit.
There has been for a number of decades an additional program, whereby the contribution rates were raised in return for supposed higher pensions. Maggie did indeed allow these extra payments to be diverted to private accounts. Not the basic charges in return for the basic benefits, but the extra for the extra. These schemes still exist and no, there has been no limit or cap placed upon the charges that may be made by investment companies.
The third strand of UK pension provision is and was the company pension scheme alongside individual voluntary ones. These have taken a hammering under the current Govt as their tax privileges have been withdrawn. An analogy would be if Congress decided that 401ks lose their tax privileges. Not surprisingly, this has caused problems, but they are caused by changes in taxation law, not changes in fees charged by the investment companies (there are yet others in recent changes in capital and actuarial requirements, making bonds rather than stocks the preferred investment of these private funds, to the detriment of future returns).
In an attempt to encourage the low paid to save the Nu Labour Govt introduced something called the "stakeholders pension". This indeed did have a cap of 1% on fees chargeable. It is completely hopeless as for the low paid saving for their retirement is a nonsense. While they might have a small extra income after 40 years of such saving, that extra would be smaller than the difference between the basic state pension (which they would already get as above) and the guaranteed minimum income provded by the welfare system. They would, therefore, save, only to see their benefits reduced by exactly the amount of their extra income. Just about the only people who have taken out these schemes are rich grandparents for the kiddies, as it is a great way to avoid inheritance tax.
Finally, it was not "regulators" who introduced the cap. It was primary legislation.
Anyway, so far we have the good professor spouting a large amount of nonsense.

The same thing is happening in Britain. Its 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.
Britain's experience is directly relevant to the Bush administration's plans. If current hints are an indication, the final plan will probably claim to save money in the future by reducing guaranteed Social Security benefits. These savings will be an illusion: 20 years from now, an American version of Britain's commission will warn that big additional government spending is needed to avert a looming surge in poverty among retirees.

As above, Mrs.T did not privatise the system. There are three things that are causing increased poverty amongst the elderly.
1) Taxation changes that make private pension provision less efficient. The current tax take (new since 1997) is 5 billion a year. If that were not being taken out of the private pension plans that part of the system would not be in the trouble it is now.
2) Poverty is being described in relative terms. One of the things that Mrs.T did do is link increases in pensions to the cost of living, not the increase in wages (I know that this change is something under discussion in the US), so, as pensions only keep up with prices not the faster increase in wages, of course more pensioners are defined as being in relative poverty. Pretty much a "No, Duh" sort of observation.
3) Increased lifespans mean that those who do have private pension pots (and such must be converted into annuities by the 75 th birthday) must make them cover longer periods of time. When an annuity must cover a decade of likely extra life, not 5 years, it really is not a surprise to find that they pay less each year.

So, the KrugMonster has interrupted his book vacation in order to pronounce upon the Social Security debate. To make his point he has completely misrepresented the UK experience, the only question left being whether this is the result of lies, evasions or simple ignorance?

Update. Further thoughts occured while out with this blog’s canine security operatives. The extra system mentioned above, over and beyond the basic state pension, was called SERPS (State Earnings Related Pension Scheme) and what Maggie changed was as follows. (Working from memory on these numbers) Way back when National Insurance payments (the equivalent of FICA) were 8.9% of wages (and a further 10.9% paid by the employer) between about 50 pounds a week and 400. Very similar to the US situation. Then, new legislation said that some part of this (2% I think, from each side, making 4% of wages? Or was it 2% overall. Matters not for my point.) could be diverted to private investment accounts. This is exactly what is being proposed in the US for the part privatisation of Social Security. That a modest proportion of taxes paid should go into private accounts. Agreed? This is what is being proposed?
Look again at what Krugman is saying. He states that the program was privatised. No, it was partly so, just as is being proposed in the US, individual savings accounts. He says that fees had to be capped. No, they were not and have not been. It is an entirely different pension scheme which was originally designed with such caps in place. Conflating the two is a little, well, what? Misleading?
The more I think about this the more contemptible I find the Professor’s article this morning. The UK did, in the 1980’s, exactly what is being suggested for the US and Social Security. A portion of payroll taxes could, at the request of the individual, be placed in private savings accounts. The basic State Pension remained. In trying to look at the effect of such a change if it were to happen in the US, Krugman does not actually look at what happened to SERPS in the UK, he simply blathers about all of the other changes and problems over the past couple of decades. Mixing and matching like that is intellectual dishonesty. I don’t actually know whether "opting out of SERPs" has worked or not but I do know that the problems he describes are not a result of it.

Update part deux:Tom Maguire is also all over this pointing out the errors made in the US part of the argument.

 

December 17, 2004 in Economics | Permalink

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» When In Doubt Mislead, Mislead, Mislead from Deinonychus antirrhopus
Kevin is still blogging about what he percieves as a non-problem, Social Security. And as is typical Kevin is badly misleading his readers. First up is a technical issue. The inflation rate that most of us are familiar with is the Consumer Price Index,... [Read More]

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Comments

As always, excellent writing. If you haven't, you should send a link to Luskin's site, the conspiracy to keep you poor and stupid.

Posted by: Gordon | Dec 17, 2004 5:01:14 PM

Do you have any links acting as citations, for one?

Posted by: Brian | Dec 18, 2004 12:20:17 AM