Kevin Drum has been exploring the liberarian and conservative parts of the web in an effort to gauge reactions to partial privitazation of Social Security. He writes a cryptic note:
As near as I can tell, privatization doesn't seem to make sense on any level (including the conspiracy theory level that it's just a payoff to Wall Street, by the way).
Assume a worker making $35,000 per year puts 2% of wages in a private account. That would result in an account of about $58 after the first month and $700.00 after the first year. If the mutual fund company charges an annual fee of 1% (and my funds are with Vanguard which charges substantially less), then the fund will have yearly income from each account of less than $7.
From that money, the fund has to comply with SEC regulations, prepare and send send out a prospectus for each account, prepare and send out quarterly and annual reports as well as account statements and tax statements for each fund held.
The fund must also pay for trading costs, fund managers, computers, lawyers, accountants, office space, executives, complicance officers, clerical employees, insurance, and postage.
I get at more than a dozen items of mail from Vanguard each year. Four times per year, I get account statements. The end of September statement arrived in an envelope with $1.06 of postage. Just mailing out my account statements costs Vanguard $4.24 per year. In addition, they mail me annual fund reports, tax statements, proxy information, and the like. I dollar cost average into a Vanguard account so they must send me a monthly purchase confirmation. Each of those cost about $0.29 for postage. All told, Vanguard spends in excess of $7 per year on my account for postage alone.
Vanguard is able to afford that postage on my account while charging less than half of one percent on the account value (less than 0.20% on the index funds) because I have substantially more than $700 invested.
Does anyone think that mutual fund companies will make a killing off a lot of very small accounts? At least in the first few years, they are likely to lose money on every account if they charge a reasonable fee. The alternative is to charge the actual costs of maintaining the account. If that happens, much of the gain hoped for by investing Social Security funds in the stock market will be lost.
Dwight,
Total US market cap is $13 trillion. Privatization will shift about $75 billion from treasuries to corporate stock. Drop in a bucket, imho. Even if one assumes that most will go straight into the S&P500, that's still $11 trillion mkt cap.
Mutual funds, Republicans, and Bush White House can't be that stupid. I'm beginning to think that they really do want "ownership" and "responsibility" of a funded-retirement plan as opposed to pay-as-you-go. Is another explanation?
Posted by: Peatey at November 18, 2004 08:57 PMUh, that's $75 billion per year, just to be accurate.
Posted by: Peatey at November 18, 2004 08:58 PMA quote from http://www.washingtonmonthly.com/features/2003/0307.confessore.html
"For years, conservatives have been pushing to divert part of Social Security into private investment accounts. Such a move, GOP operatives argued, would provide millions of new customers and potentially trillions of dollars to the mutual fund industry that would manage the private accounts. The profits earned would, of course, be shared with the GOP in the form of campaign contributions. In other words, by sluicing the funds collected by the federal government's largest social insurance program through businesses loyal to the GOP, the party would instantly convert the crown jewels of Democratic governance into a pillar of the new Republican machine."
Just a brief excerpt from a longer article which maybe you have read already. Anyway, the point I want to make is that maybe this is one of Bush's "big" ideas - maybe they are going to come up with a rule or a law that lets you take as *much* of your social security as you want (meaning what is already earmarked for you from your earnings - I am sure you get the same update I do from the government), immediately, and put it into a private fund. Then the issue of the cost to the mutual fund companies becomes moot. I keep reading about this small portion and how the mutual fund companies don't want millions of new $700 accounts, but millions of new $10,000 or more accounts might be okay with them, no?
Quite so Anthony. A 40k per yer worker putting 12% of wages into the market is something very different from the point of view of the mutual fund company.
Posted by: dwight at November 20, 2004 02:49 PMI wouldn't worry about the costs of the management for these accounts winding up on the shoulders of the brokerage firms. Don't you think there'd be some new tax breaks for these firms -- perhaps deductions for postage, or maybe even franking privileges? Or maybe these retirement accounts would fall under some new class of securities, exempt from SEC reporting rules. Maybe quarterly reports won't be mailed but will be available on the Social Security website or at your local Social Security Field Office. After all why should private companies be penalized for doing the public's business?
Posted by: evano at November 22, 2004 05:22 PM