Your president says investing for your retirement is easy.
THE PRESIDENT: Yes. And at age 23, that seems like an awfully young age for people to be investing. Investing is kind of a powerful word for a lot of people in America. They wonder, can I possibly figure out how to invest? And I’m just curious, have you found it to be a burdensome experience —
MS. SEITZ: I have not.
THE PRESIDENT: — a nerve-wracking experience, an easy experience?
MS. SEITZ: I very much enjoy it. I like being able to go through and see what is doing well, what is not.
THE PRESIDENT: Yes, good. But you’re paying attention to it. It’s a subject that is — you’re comfortable in talking about investment, which is an important thing for people to understand. Sometimes you hear what these personal accounts — I mean, asking people to do something they’re not capable of doing. Frankly, it’s kind of an elitist point of view, isn’t it? Plenty of people are capable of learning how to watch their money, particularly since it’s their money.
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.
“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.
[T]he president’s accounts plan would require people to do a very good job at investing.
Under the proposal, Americans born in 1950 and after would be able to divert a portion of their Social Security payroll taxes into individual investment accounts. But in return for doing so, their traditional Social Security benefit would be reduced — by the amount diverted plus a 3% annual after-inflation charge on that amount.
With inflation now running about 3%, that means account holders might have to earn 6% a year just to break even. Anyone who followed Markowitz’s approach — putting half of their balance in a low-interest investment — would almost certainly lose money by signing up for accounts. So would someone who followed Akerlof’s approach — placing a substantial amount of it in money market accounts, which now pay about 2%.
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.
The same is true of an estimated 50% of Harvard’s 15,000-member faculty and staff, who permit all of their retirement savings to be funneled into money market accounts, according to the university, by failing to specify how they want their funds invested.
The forget-about-it approach also applies to most of the 3.2 million members of TIAA-CREF, or Teachers Insurance and Annuity Assn.-College Retirement Equities Fund. TIAA-CREF oversees retirement investments for most of the nation’s college professors and research scientists. Almost three-quarters fail to make a single adjustment in their retirement accounts during the course of their careers, despite repeated urgings by experts that people change their mix of investments as they age.
“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?”