Demagogue

The "Saving Social Security" document that Republican leaders drafted contains two boilerplate speeches that GOP members of Congress can use to voice support for Bush's private-accounts plan. On page 98 of the 103-page document, one of these speeches addresses the issue of administrative costs that would be absorbed by private accounts:

While no one manages money for free, the best estimate is that the administrative costs for the government to run this system would be reasonable — a yearly charge of three dollars for every thousand dollars in one's account.

That translates to .3%. But the GOP's cost estimate reeks. The management costs of mutual funds offer a gauge of what might be expected under private accounts.

In a 2003 speech, John C. Bogle, the founder of the Vanguard family of mutual funds, noted the upward trend of operating costs. Bogle added that official cost estimates from mutual fund companies often obscure reality:

Despite the truly staggering economies of scale in mutual fund management, fund investors have not only not shared in these economies. They have been victims of far higher costs.

The fund industry reports that the costs of fund ownership have steadily declined, but it is difficult to take that allegation seriously ... even accepting the industry data at face value, the cost of mutual fund ownership is vastly understated.

Why? Because management fees, operating expenses and sales charges constitute only a fraction of fund costs. Portfolio transaction costs — an inseparable part of owning most funds — are ignored. Out-of-pocket costs paid by fund investors are ignored. Fees paid to financial advisers to select funds (partly replacing those front-end loads) are ignored.

Put them all together and it's fair to estimate that the all-in annual costs of mutual fund ownership now runs in the range of 2.5% to 3% of assets.

In other words, the GOP's talking points underestimate private accounts' management costs by nearly 10-fold.