Wednesday, May 11, 2005


Why don't we let Bush try it first?

Although, if his history is any guide, even if he completely fucked up investing for his retirement (the way he fucked up almost every other business venture he ever got involved with), it's a near perfect guarantee that some rich friend of his Daddy would make sure he didn't have to eat dogfood - unless he wanted to, of course. (With Dubya, you never can be too sure.)

Too bad the rest of us don't have that kind of "safety net."
Experts Are at a Loss on Investing

Nobel winners and top academics fumble the sorts of decisions Bush's Social Security overhaul plan would ask average Americans to make.

Harry M. Markowitz won the Nobel Prize in economics as the father of "modern portfolio theory," the idea that people shouldn't put all of their eggs in one basket, but should diversify their investments.

However, when it came to his own retirement investments, Markowitz practiced only a rudimentary version of what he preached. He split most of his money down the middle, put half in a stock fund and the other half in a conservative, low-interest investment.

"In retrospect, it would have been better to have been more in stocks when I was younger," the 77-year-old economist acknowledged.

At least Markowitz invested more wisely than some of his fellow Nobelists. Several of them concede that they have significant portions of their nest eggs in money market accounts, some of the lowest-returning investment vehicles available.

"I know it's utterly stupid," confessed George A. Akerlof, a UC Berkeley professor and 2001 winner of the Nobel Prize in economics.

As President Bush crisscrosses the country promoting his plan to overhaul Social Security, he argues that Americans are ready to trade in a portion of their traditional benefits for ownership and control over their own investment accounts. People have grown so comfortable with stocks and bonds, he asserts, that they can invest their way to more prosperous retirements by watching their quarterly statements, adjusting their portfolios and looking out for themselves.

But a growing body of research shows that millions of Americans fail to get even the most elementary investment decisions right.

"I think very little about my retirement savings, because I know that thinking could make me poorer or more miserable or both," quipped 2002 Nobel Prize winner Daniel Kahneman of Princeton University.

"I would rather spend my time enjoying my income than bothering about investments," said Clive W.J. Granger, an emeritus professor at UC San Diego and a 2003 Nobel Prize winner.

White House officials dismiss such remarks as largely irrelevant to the Social Security debate. They describe the president's proposed investment accounts as voluntary and low-risk.

They suggest that those who oppose the accounts are taking a special swipe at low-income Americans, who otherwise would not have the money to invest on their own.

"It's almost an insult to the ability of some Americans to take charge of their retirements," Bush spokesman Trent Duffy said.
Fine, Mr. Bush. You first. Publish your portfolio on the White House Web site. Let's see how you do.
That Nobelists and other highly educated professionals get tripped up by retirement is hardly proof that people can't handle their own retirement investments. But it does suggest that few are terribly good at the job, and fewer have the time or inclination to get better quickly.

And the president's accounts plan would require people to do a very good job at investing.

Markowitz, Akerlof, Kahneman and Granger are not the exceptions among the nation's most-educated elite or the general population in taking a cautious or hands-off approach to retirement investment.

In interviews and e-mails, five of the 11 Nobel winners in economics during this decade and a handful of others since 1990 said they failed to regularly manage their retirement savings. One even says he missed the mark in how he invested his prize winnings.
Thus adding ammunition to the old argument, "If you're so smart, why aren't you rich?"

But if these guys can't do it, what chance do the rest of us have?
"If the creme de la creme of the economics profession and American academia can't get these sorts of things right, why should we expect everyone else to?" asked Yale finance theorist Robert J. Shiller. "Why should we be surprised that people who already carry a heavy burden paying their bills and keeping up with their 401(k)s, if they have them, are reluctant to take on new responsibilities with these [Social Security] accounts?"

Part of the problem is that retirement investment is one of the most difficult financial tasks Americans undertake — far more difficult than financing a house or paying for college because it involves so many imponderables so far in the future.

"Retirement is not like buying a cup of coffee," said Joseph E. Stiglitz, a 2001 Nobel Prize winner, former Clinton administration economist and Columbia professor. "It's not something you get to do over and over again and learn from your mistakes."

Recent research suggests that people, by nature, often make poor economic decisions.
But Bush, his own security guaranteed the day he was born, has no feel for what it's like not to be so insulated - and isolated - from the vicissitudes of life. In other words, he don't give a shit.
"Just because people have the economic self-interest to do something and just because they are given a substantial incentive to do it doesn't mean they're going to do it, or do it correctly."

Not even if they're highly educated, not even if they're Nobelists.

A number of safety features would be built into the president's Social Security accounts, the White House said. Account holders would be allowed to invest in only a handful of conservative stock and bond funds. When they reached age 47, they automatically would be switched into a lower-risk life-cycle fund. In addition, when most people retired, they would have to buy an annuity that promised a steady stream of monthly payments. They would not be able to withdraw the money as a lump sum.

The inclusion of these protections points to a dilemma for Bush in making the case for accounts: Most Americans recognize the dangers the protections are intended to shield against.

For some, it is a powerful argument for keeping Social Security what it is today, a safety net, rather than converting the program into an individual investment vehicle.

"We have a lot of people out there with 401(k)s who have never managed an investment in their lives and are just trying to keep themselves from drowning," said William F. Sharpe, a Stanford finance professor emeritus who shared the 1990 Nobel with Markowitz and Merton H. Miller and founded a company that offers to make people's retirement choices for them.

"I suspect if you asked them, they'd say: 'I've got enough trouble; I don't want to screw up my Social Security.' "
Economics and investing are not the same thing, or the professoriate really would be rich. But again, expecting us to manage our retirement investing is no fairer than expecting us to manage our colonoscopy. And saying so is an insult to no one - except, of course, George W. Bush.

The challenge stands - if it's so easy, show us how, Mr. President. Lead the way.
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