Refuted economic doctrines #4: individual retirement accounts

The news that, on average, superannuation investments lost nearly 20 per cent of their value last year Johnny Got His Gun movie download comes as no surprise, and its likely that there are plenty of unrealised losses still on the books. Still, while the losses on the stockmarket have been as bad here as anywhere, we can take some comfort in the fact that Australian superannuation funds, like Australian banks, don’t seem to be in the same trouble as some of their overseas counterparts. As the government scrambles to keep the financial system operational, it’s natural to ask what, if anything can be done about this.

In the short term, the answer appears to be, nothing, or very little. Fortunately, for most people the losses are, in a sense, notional, wiping out the spurious gains of previous years. It’s only for those at or near retirement that the crash presents an immediate economic problem. Given that the demand for labour is plummeting, the government could perhaps consider an ex gratia payment to people who choose to retire now. There are all sorts of problems with this, and in normal times, such a proposal would never pass muster, but plainly, these aren’t normal times.

Looking to the longer view, this is more than a bad year for superannuation funds. The crash and the way it came about undermines the fundamental premise that has driven Australian retirement income policy for the past decade: that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts, is the best way of financing retirement. The old age pension, in this view, serves as a residual for those who don’t manage to save enough.

This privatised approach (also represented in Bush’s failed attempt to reform Social Security in the US) is has been largely discredited by the crash. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk. Morover, the idea that stocks will always perform better than bonds over the medium term (say a decade) has been proved false. This is a central premise of long-term investment advice.

We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.

Update 27/1/09 The New York Times agrees. And today’s Fin has a piece from Robert Shiller denouncing the efficient markets hypothesis. I’d better get cracking with more refutations, while there are still plenty of doctrines left to refute.

108 thoughts on “Refuted economic doctrines #4: individual retirement accounts

  1. John, can I point out that comment 98 is a clear breech of the blog rule “Comments which include personal attacks on me as author of the post or on other commenters (flames) will be deleted, or edited to remove such points.”

  2. Monkey’s Uncle persists…

    ‘I try not to spend too much time nitpicking over the smaller details of other people’s posts, but it seems you are contradicting yourself…. So in one sentence you deny that you are claiming that luck is the main cause of unemployment. Yet in the very next sentence you say that an unemployed person can “fairly be said to be unlucky.”‘

    Where’s the contradiction? Do I ever assert that bad luck causes unemployment?

    “But this doesn’t change the underlying argument about whether luck is the main cause of unemployment. By defintion, someone can only ever be said to be unlucky if you believe luck is the main determinant.”

    Readers, he made that up and ascribed it to me. Let me spell it out with a hypothetical: ten passengers need to get into a lifeboat that can only hold nine. One doesn’t make the cut. Is it bad luck that makes there not be enough space? Maybe, maybe not. Is it bad luck to be the one who doesn’t make it? Yes. Similarly luck may affect which persons are unemployed, but not that there will be unemployed persons. Further, even if there are other factors affecting which – as in a women and children first policy for lifeboats – it would be bad luck to have those factors. Even if someone couldn’t get work because he were shiftless and lazy, one can also assert that he is also unlucky – if nothing else, unlucky not to have rich and influential relatives.

    He continues of my “Now that is a downright lie. I never made any statements about his position whatsoever, apart from direct quotation of comments he made as Nick K or as Monkey’s Uncle (I did anticipate a possible objection he might make, at one point, but I made it clear that I was not responding but anticipating). Readers, go and look.”, “So let me get this straight. It’s okay because you weren’t actually claiming that I had said anything different? You were merely projecting an assumption about what I believe, even though that had nothing to do with what I actually wrote”.

    Readers, he is making that up. I did not project an assumption of views onto him. Look at what he cites in support of that: ‘You said “I suppose Monkey’s Uncle is liable to read that as saying that all people without work in good times are of that sort.” Given that I had already said “I appreciate that sometimes people lose jobs through risks beyond their control.”, it seems clear that you were trying to project a view onto me that was clearly out of step with what I said. What is the point of that?’

    Now look at what I really wrote, complete with what he cut just there emphasised: “For people in such a situation, applying pressure to them to find work is hardly going to achieve any results along that line. I suppose Monkey’s Uncle is liable to read that as saying that all people without work in good times are of that sort. No, I am just saying that the set of such people is like that, a tautology that doesn’t even imply that there are any such people at all.” I suspected that he might misread what I wrote as a claim that all the unemployed were involuntarily unemployed, so I headed it off. I was denying that I held a view, not projecting one onto him. All I projected onto him was a tendency to misread and misrepresent – something that he has amply demonstrated.

    That means that his “As I said, you erected a straw man and knocked it down” is another downright lie; I never, not once, projected views about unemployment onto him, and by now he has been told that often enough that there is no room for honest error.

  3. John, if I may reply to Monkey’s Uncle by saying you might want to take into account the NEA’s views as to why public schools in the USA are rooted and require extra funds. America’s public schools are struggling to provide quality services to increased numbers of disadvantaged students and students with special needs, while also implementing accountability and testing mandates. Programs such as Title I, IDEA, and Pell Grants are already underfunded and cannot meet the needs of eligible students. In the 2005-06 school year, almost 11,000 public schools had already failed to make Adequate Yearly Progress for two or more years under NCLB provisions, and thus faced federal sanctions. These schools will face even greater challenges in the coming year as testing and teacher quality requirements go into full effect. In fact the 2007-08 school year is the first year of mandated science testing. The federal government is moving backwards, away from its commitment to provide 40 percent of the costs of providing special education services to students. Because of inadequate federal support, schools are often unable to provide the full spectrum of services mandated under IDEA. In addition, administrators must sometimes cut other critical programs to fund mandated IDEA services.
    An increase is also needed to ensure adequate resources for higher education programs such as Pell Grants. As public universities, long seen as the “affordable” option, have to raise their tuition to make up for severe state budget cutbacks, the ability for low-income individuals to pay for college becomes an even greater challenge. When the Pell Grant program was first created, the maximum grant for the poorest students covered 84 percent of the cost of a public four-year college. Today, it covers only 39 percent.

  4. PM, if I now interpret you correctly, you were clarifying your own position rather than interpreting mine.

    According to you, I was likely to misinterpret your position as being that bad luck is the sole cause of unemployment. Yet as I had previously made clear, that was not my interpretation of your views. My interpretation of your views was that you believe bad luck is the MAIN cause of unemployment. Not that it is the SOLE or ONLY cause of unemployment. So this still amounts to a straw man. What is the point of claiming that I may interpret your views differently, when I had already explained my interpretation?

    So even if you did not project onto me false assumptions about my views on unemployment, you projected onto me clearly false assumptions about my interpretation of the views of yourself and those who disagree with me. This is equally pointless and misleading.

    If I misinterpreted your straw man, I do apologise. But sometimes I have other things to do than intuit the finer meanings of straw men.

    “Readers, he made that up and ascribed it to me.”

    You made this comment in response to my discussion of the implications of you saying people are “unlucky” to be unemployed. So what did I make up? The only thing I ascribed to you here was the use of the term “unlucky”.

    “Where’s the contradiction? Do I ever assert that bad luck causes unemployment?”

    This is wilfully obtuse. If you say that someone who finds themselves unemployed can be said to be unlucky, this clearly implies that luck is a major cause of unemployment.

    Moreover, you have no right to call other people liars simply because they don’t always interpret correctly the most byzantine of distinctions.

  5. Could everyone please cool down. It’s easy to get the wrong end of the stick in a long comments thread, and unhelpful to use terms like “lie” and”obtuse”. I haven’t got time to sort out who hit who first here, but please stop now.

  6. Monkeys Uncle at says
    “I think it’s true that since about the early 1990s, there has been some decline in public sector employment as a share of overall employment. But in the decades prior to then, there were steep increases in public sector employment. So those reductions came off a historically high base.”

    I think we have had this dicscussion before in another thread and pulled out the numbers. Nos of public sector employees has increased marginally since the mid 1970 (very marginall given population increae), public expenditure has decreased as a percentage of GDP since the 1970s.

    If you are going to tell me its coming off a high base then you are talking about the post war three decades of the 1940s/50s/60s when unemployment averaged 1%.

    Bring it on!! because the direction of stripping public sector employment since the late 1970s to now is totally, tragically and monumentally wrong in a country with only 20 million people in it. We are not any “grand manufacturer” here and resources are too volatile, plus we are a dry country but even drier after climate change and water diversion. Seriously some things stick out like (as my mother might have said) like an old moll at a christening ( or something worse if I said it).

  7. Michael “When the Pell Grant program was first created, the maximum grant for the poorest students covered 84 percent of the cost of a public four-year college. Today, it covers only 39 percent.”

    Michael, it would be worthwhile to also look at whether there has been a significant increase in the number of students claiming the Pell Grants, as well as to what extent the costs of college education have increased during this time.

  8. “I’d better get cracking with more refutations, while there are still plenty of doctrines left to refute.”

    I don’t think you’ll run out any time soon. You haven’t even really touched the idea that every human being is rational, and all the corollaries that are derived from that.

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