The latest hot topic on the identity theft front is a paper published on Monday in The Proceedings of the National Academy of Science by two professors at Carnegie Mellon on how easy it is to guess a person’s social security number.

That day Ars Technica reported on it. Also, the authors of the paper started a blog on it. The AP picked it up Tuesday. CrunchGear blogged on it then too. And Wednesday brought posts from Wise Bread and Wallet Pop.

This is a great story. It combines several of my favorite themes. There’s the ever amusing hysteria over identity theft, which apparently renders a person incapable of rational thought and perspective. There are the unintended consequences of seemed-like-a-good-idea-at-the-time government policies. And there is the recurring phenomenon of folks who report and comment on academic papers without reading and/or understanding them.

The researchers, Alessandro Acquisti and Ralph Gross, developed a methodology for guessing SSNs based on publicly available databases and some often publicly available data about people, specifically their date and place of birth. The method is orders of magnitude less accurate than suggested in the blogosphere, but it may be a lot more accurate than you might imagine. To understand why requires a bit of a lesson on the history and mechanics of Social Security Numbers.

When SSNs were invented in the 1930s nobody intended them to be secure or particularly hard to decipher. The main concern was that they be easy to issue in a pre-computer age. Each number was (and still is) made up of three groups of digits. The first three, known as the Area Number (AN) defined codes that were doled by state, so that local  Social Security offices in each state could issue numbers without consulting a central registry. The most populous state, New York, got 85 ANs to use (050 to 134) and the least populous, Alaska, got only one, 574.

The next two digits, the Group Number (GN) has no particular significance except that it defines a “group” of 10,000 possible numbers. Each Social Security office uses up an entire group block before going on to the next one. (Which was usually the next even number. Only once 98 was used up would they resort to odd GNs.) And then there are the last four digits, known simply as a Serial Number (SN). These are assigned in order until the group block runs out.

None of this was (or is) even vaguely a secret.  The Social Security Administration went so far as to regularly publish a table listing which group numbers had been used in each state by year, to aid in the detection of fake SSNs.

That said, it was still nearly impossible to guess a person’s SSN even if you knew basic information about them, such as where and when they were born. Enter two well meaning government innovations with delightfully Orwellian names, the Death Master File (DMF) and the Enumerated at Birth (EAB)program.

The DMF is a very long list of dead people. It contains, among other things, the deceased’s date and place of birth and SSN. This is useful to three groups 1) amateur genealogists 2) those who want to detect people fraudulently using the SSNs of dead folks and 3) Carnegie Mellon professors who want to use the records of recently deceased young people to build a really good database of what SSNs were being given out where and when.

They could do that because of the EAB. It may surprise you young ‘uns, but until about 20 years ago, babies did not have SSNs. (Remember the movie Big? There’s a scene in which Tom Hanks almost gets caught because he has no SSN.) A person applied for a SSN when they started working or opened their first interest-bearing bank account, which is to say at a relatively random point in time, ten to twenty years after birth.

Then somebody in Washington figured out they could stop a whole lot of tax cheating if they made taxpayers list the SSNs of their claimed dependents. As a part of this scheme, they started the EAB, which makes filing for a SSN a routine part of maternity ward paperwork, along with getting a birth certificate. And presto, for people born after the late 1980s, knowing their date and place of birth and SSN gives you a significant insight into the SSNs of other people born there and then.

Acquisti and Gross may or may not be the first to work this out, but they are apparently the first to realize what a great big splash could be made by pointing it out publicly. Today, knowledge of a person’s SSN plays the role that knowledge of a person’s true name played in certain primitive societies. A person whose SSN becomes known to the dark forces will have no end of evil spells cast upon them. Suggest that there is a sinister way in which an SSN can be divined and you’ve got the makings of some great viral internet buzz.

Just to make sure, Acquisti and Gross added in the speculation that an evil-doer could find dates and places of birth from sites such as Facebook. Identity theft and damage done by social networking in one story? This one has legs.

Only 48 hours after the original paper was posted Wallet Pop breathlessly told us

… new research indicates that it is possible to determine one out of every ten social security numbers knowing only a place of birth and birthdate!

Which, if true, would no doubt occasion immediate Congressional hearings. Alas, the numbers are bit off. Actual readers of the paper (as opposed to readers of blog posts based on other blog posts based on wire stories based on press releases about the paper) know the accuracy to be just a bit less than one in ten.

The odds of guessing right depends on the year of birth and the state. To maximize the chances of guessing right, you want a recent year for which the data is nice and clean and EAB is well ensconced, but not so recent that there are too few entries in the DMF for people born that year. And smaller states are much easier because fewer babies are born there each day.

For somebody born in Alaska in 1998, essentially the best case scenario for guessing right, Acquisti and Gross estimate they could get a full SSN 58% of the time within one thousand attempts. My calculations translate that into a 1 in 1153 chance for each guess. You can see how that might be confused with 1 in 10. For somebody born in New York in 1998, the paper estimates the probability of getting it right in 1000 tries at 3%, which I work out to be a 1 in 32,831.

We might get Congressional hearings anyway. A 1 in 1153 chance of guessing right, even if it only applies to tiny number of Americans, isn’t okay. This isn’t a hard problem to fix, the Social Administration just has to abandon a geographic allocation system that stopped making sense during the Johnson Administration. And I think we can allow 11 year-old Alaskans to get new SSNs.

That said, there is no need to get particularly excited about this. I can forgive Acquisti and Gross for hyping their paper. Even associate professors gotta make a living. But everybody else really ought to check their sources before they use exclamation points.

Are they in Latin? Do they involve obscure legal terms? Perhaps they are poorly translated from some foreign tongue?

No, they are unreadable to 4 in 5 Americans because those sneaky credit card companies have written them in standard English, but at a 12th grade level. Bastards.

Do not let the fact that 80% of Americans have successfully completed the 12th grade confuse you. The average American adult reads at a 9th grade level.

At least we are in high school. More than half of us, anyway.

From CreditCards.com:

"Credit card contracts and other such documents are written in dense prose for a reason: So that the customer will NOT be able to understand it," notes Roy Peter Clark, a national expert on writing and a senior scholar at the Poynter Institute in St. Petersburg, Fla. "I may be cynical, but I don’t think their writing strategies are accidental, the collateral damage of a bureaucratic mindset. I think those writers know exactly what they are doing."

Much as I hate to admit it, Mr. Clark is more cynical than I am. (And can there be any clearer indication of widespread illiteracy than that a man who uses “NOT” in a sentence is considered a national expert on writing? Alas, I digress.)

12th grade is the average reading level of all agreements, not weighted by the size of the issuer. Most of the really big boys had appropriately dumbed-down ones. Wells Fargo, Citibank, B of A, and Amex all came in at 9th grade or below. Capital One managed to suck down to a 7.3 grade level. (New slogan: What is in your wallet besides cash and ID?)

In contrast, the top 10 agreements with the highest grade levels measured is a list of tiny and obscure issuers you have never heard of. Top honors went to GTE Federal Credit Union at an 18.5 grade level. Apparently, you need to be halfway through your last year of law school to understand it.

I hypothesize (that means guess) that the larger banks have more money to spend and hire professional writers to make their agreements easier to read. The smaller outfits mostly don’t, meaning what you see was crafted by a lawyer who had other concerns on his mind.

Of course, the much bigger problem here is that Americans can’t read. As disheartening as it is to learn that the average American reads only at a 9th grade level, it is truly alarming when you learn what is meant by 9th grade. CreditCards.com provides a graphic with an assortment of works and where they score on the same scale as used for the card agreements.

Twilight, that favorite of sixth grade girls, comes in at 8.2. The King James Bible gets an 11.1. But it’s not the real 17th Century King James, the one that starts “In the beginning God created the heaven and the earth.” This is a modern version that starts “First God made heaven & earth.”

The graphic shows the average credit card agreement at 12.4, but, in what I can only assume is a desperate effort to make us all feel better, it illustrates this with what is probably the most difficult sentence from the worst-case GTE Credit Union agreement. Nice try, guys.

A New York Times editorial measures at 17.2, meaning unless you have a little more than a year of grad school it is incomprehensible to you. Just as well, I suppose.

The Bill of Rights comes in at 22.6, or more than six and a half years of grad school. No wonder phrases like “Congress shall make no law” and “a well regulated militia” cause so much confusion.

But in a way this discussion of reading levels and card agreements is, you will pardon the expression, academic. Four in five Americans may not be able to read the agreements, but I am willing to bet that 99 in 100 have never tried.

Much as I applaud Capital One’s effort to rephrase their contracts into the monosyllabic vernacular (they use common short words) I think it is more good citizenship than good business. They could issue the agreements in Latin, which would be a nice tie-in with their anti-barbarian ad campaign, and I don’t think their business would suffer at all.

How often do the 80% of Americans who can’t understand their card agreements cancel the cards because of it? Has it, in fact, ever happened?

Telling consumers to read the agreements they sign, including credit card agreements, does indeed have the flaw that they may not understand them when they do. (CreditCards.com calls this a catch-22. It is not. That term is from a great work of American literature by the same name, in which…. Oh never mind.)

But let us all be honest and admit that the core problem is not that Johnny can’t read his card agreement, it is that he won’t. It is not the evil banks writing obscure prose that are at fault. Indeed, it seems to me that they would generally prefer that consumers understand what is expected of them. But the consumers cannot be bothered. Just sign up for the card and assume that the rules are what you think they should be. If you get in trouble later on, well that’s what government is for, isn’t it?

[Photo – Lotus Head]

It is an interesting, but which I mean amusing, theory. It is not that I do not think that there really are folks, even millions of them, who have mental health issues such as bipolar disorder, which could be trivialized as two versions of the same person sharing one body. Others have substance abuse problems that cause an irresistible need to ingest certain chemicals.

But the people I am thinking of do not have such problems. They have nothing more profound than an inability to save as much of their income as they think they ought to. This they ascribe to mental illness.

Of course, they don’t call it that. In fact, they don’t call it anything at all, merely acting as if they had two or more personalities, and recommending such behavior to others, without reflection on the implications. Wise Bread recently ran a typical example of this line of thinking from PT Money, How to Create Barriers to Your Savings.

The gist of the post is that if you want to save you need to find a way to prevent yourself from having access to your own savings. Good You should put money into a 401k so that Bad You cannot spend it so easily.

Despite the implied craziness, this is relatively common personal finance advice. David Bach developed an entire series of books from it. And nowhere in this literature have I found either an acknowledgement of the assumption of craziness or anything like a warning that this is strong medicine for the few who need it.

This lack of reflection on what is going on isn’t helping any. Not being able to save what you think you ought to is a real problem and, I infer, a relatively common one. People experiencing it should address it directly and rationally. Only if that fails should they resort to drastic measures such as hiding their own money from themselves.

Much of the appeal of “making it automatic” is, after all, that you do not need to address the issue. You do not need to think about it at all. Just arrange to have a portion of your income sequestered so that Bad You cannot get his grubby hands on it and Good You will live happily ever after.

It is probably a better idea for the two of you, Good and Bad, to sit down and have a serious and thoughtful discussion. For example, and I mean this only as a reasonable possibility, it could turn out that Good You is the crazy one.

I believe that many people, and I am thinking particularly of younger ones, subscribe to a belief that they should save an arbitrary percentage of their income, such as 10%. This they consider to be virtuous and good for them, like eating right and getting enough exercise.

The problem is that the percent of income to savings target was likely not all that thoughtfully derived. It was probably selected arbitrarily or taken from some personal finance guru. (Has anybody else noticed that personal finance writers always recommend numbers like 10% or 15%? You would think that a figure that had any science behind it at all would be unlikely to be so round.)

It could be, and again I throw this out only as a possibility to be allowed for, that when 25-year-old Bad You breaks open the piggy bank to buy an iPhone or spend a weekend at the beach he is being perfectly rational. It could be that it is Good You’s plan to save 10% of income out of some general principle that is misguided and crazy.

My largely unscientific opinion, based on too much time spent in the personal finance world, is that although younger Americans probably save at about the rate they should, they tend to believe that they should save more than they do. This is due to the collision of an abstract and not well thought through goal with practical reality.

Life in your 20s and 30s is expensive. Lots of stuff to acquire and kids to raise. And yet income does not peak until your 40s and 50s, when you’ve already got one of everything and the kids have left home.

That does not mean I recommend no saving until you turn 40 and then X% from there on. Everybody is different. Personally, my income has taken a precipitous drop in my 40s. Each person must establish their own goals and work out how they will get there.

If you must think of yourself as a Good You cohabitating with a Bad You, try and listen to what Bad You has to say. It could be that he, and you, are not so crazy after all.

Many homeowners owe money on a special type of loan collateralized by the house, called a mortgage. Sometimes, they “refinance” these mortgages, often to take advantage of a lower interest rate. Generally, that is no more complicated than paying off lender A with money borrowed from lender B.

However, and here is where it gets really confusing, sometimes the money from lender B is not the exact same amount owed to lender A. If more money comes from lender B, then the refinancing is termed “cash-out.” It is called that because the borrower actually leaves the closing with more cash than they had previously.

Conversely, if less money comes from B than is owed A, then it is a “cash-in” refinancing. The borrower will have less cash on hand after the transaction than he did before it.

In the Good Old Days, cash-out refis were common. House prices were buoyant and credit standards were notional. It was easy to find Bs willing to lend more money than was owed to A and on great terms. Today, house prices are at best stable, but far below previous peaks, and credit standards are strict. So cash-in refis are more popular.

The key insight here, and I admit that it is subtle, is that cash-out and cash-in refis do not make the borrower richer or poorer. All that has happened is that the borrower has increased or decreased his debt in exchange for some cash. Homeowners do not make money in cash-out refis, even though they may leave the closing with the happy feeling of liquidity. And cash-in refis do not cost money, even if they may feel like an expensive investment.

Got that? You might want to re-read the last few paragraphs until it’s all straight in your head.

Received wisdom has it that in the Good Old Days homeowners commonly did cash-out refis and treated the resulting funds as if they were lottery winnings. Only years later did they realize that they had actually borrowed more money and that the refi did not, in hindsight, make them richer. It was a hard lesson to learn, but we as a nation have now wrapped our heads around the true nature of the cash-out refi.

Cash-in refis, on the other hand, are still mysterious. Over the weekend The Wall Street Journal ran Doubling Down on Housing: Record-Low Interest Rates and a Scary Stock Market Are Prompting Investors To Sink Even More Money Into Their Homes. The sunk money in question is not for landscaping or a finished basement. The article is mostly about cash-in refis.

Some intrepid homeowners are intentionally taking a loss on their current house—and writing a big check to retire their old mortgage—in order to buy twice the home for not much more money. Others, eschewing conventional personal-finance advice, are even opting for "cash-in" refinancings, paying thousands of dollars out of pocket to settle old loans—and then taking out new mortgages with lower payments, shorter durations or both.

To be fair, taking advantage of lower prices by selling your current abode and buying twice the home could be called doubling down on housing. (Although it is a stretch if the new place costs “not much more” than the old.) But in no sense is paying down some of a mortgage, even in order to refinance it, doubling down on housing or sinking more money into a house.

Perhaps the very well covered phenomenon known as strategic default is confusing the folks over at the WSJ. A homeowner who owes much more on the mortgage than the house is worth, and who has the option to extinguish the debt by signing over the deed to the house, would be foolish to pay down the mortgage with spare cash. That would be sunk money in the sense of wasted money.

But as I have written previously, strategic default is more concept than reality. Until I see some hard numbers I am going to assume that it exists on a scale somewhere between anecdotal and urban legend. And if you exclude that special case it ought to be obvious that a change in the level of mortgage debt has no relation to the level of investment in, or exposure to, housing. A person who owns a house will experience the same profit or loss when the value of that house goes up or down regardless of how much he owes on it.

As an aside, loathe as I am to defend “conventional personal-finance advice,” it is not at all clear to me how a cash-in refi runs against it. Granted, it is not a topic much discussed. But paying down a mortgage early does come up in the literature with some frequency and is usually treated positively.

The WSJ article includes a long sidebar asking “Should You Invest Your Cash in a Refinance?” It contains an example provided by Jack Guttentag, who calls himself the Mortgage Professor and who is identified as an emeritus professor of finance from Wharton by the WSJ.

A homeowner has an $809,000 mortgage at 6%, which he refinances to a $729,000 mortgage at 4.375%, with the help of $80,000 in cash. The good professor tells us that the “Return on the $80,000 investment: [is] 10.4% annually for five years.” He does not explain his math and I am at a loss as to how to reproduce it. I really tried.

To begin with, the $80K is not a proper investment, as the homeowner is neither buying something nor lending it to anybody. It is, at most, analogous to an investment, something that “pays” money in the sense of a reduction in future interest payments. And in that sense, the rate of return on the $80K is the same as it is for paying down any debt, that is, it is the interest rate on that debt, in this case 6%.

The argument could be made that the $80K should be credited not just with the interest no longer paid on it but with the savings on interest on the other $729K. All in, the interest paid is reduced by $16,646 per year. On $80K, that is a notional return of 20.8%. (Perhaps the professor cut this in half to be safe?)

But thinking of the cash for a cash-in refi this way does not really work. Refinancing to lower your interest rate is a great idea that will save you money, but it is not an investment. Would the rate of return on a conventional A=B refi be infinity? What if the homeowner did not have the $80K but had to borrow it?

The basic should-be-obvious principle here is that cash-in refis do not increase your investment in real estate nor do they make you poorer, any more than cash-out refis decrease your investment in real estate or make you richer. A cash-in may be often be a good move, but confusing it with an investment in real estate is not helpful.

Some time ago, I made the decision to rise above such faddish things and not join. What’s the point of having a computer and going on-line if you are just going to use it to interact with other people? If I wanted to do that, I could do it in real life.

But I think I may have miscalculated. I had no idea just how pervasive Facebook would become. Two days ago, Facebook announced it had 500 million active users. That is a number so large it is difficult to put it in context. The planet contains, allegedly, 1.8 billion internet users, so Facebook has now roped in 28% of them. At the current rate of growth, 10% a month, they should have everybody around September 2011.

I plan to sign up for an account then. Because I am the last person on Earth who would join Facebook.

Facebook is now the single most popular site on the internet. And, logically or ironically, the company that provides it is now widely despised. Sort of like how an addict loves the cocaine but hates his dealer.

According to Facebook, and as quoted in The New York Times so it must be true, users spend a total of 700 billion minutes a month there. That is an average of 46 minutes per user per day. According to a recent survey by the Bureau of Labor Statistics, Americans spend an average of 42 minutes a day “socializing and communicating.”

I am not sure if the BLS means to include Facebooking in that line item or not. If not, then we now spend more time socializing on-line than in real life. Alternatively, if it is included, then all socializing done by Facebook users is now on-line. For all I know, that could be true. Not really my field.

But even if there are still some Americans who socialize the old traditional way, it should be clear that the days of physical interaction are numbered. Facebook is just too large to be stopped, its gravitational pull too strong and getting stronger every day.

By the time I sign up in fourteen months, Facebook will have completed its absorption of all socializing done by members of my species with an internet connection on my home planet. And it will not stop there. 46 minutes a day is only a meager portion of human waking hours. It will grow until it will no longer be an alternative to real life. It will be real life. Resistance is futile.

Time for another episode in my continuing series People Are Idiots. Previous installments have included how to sell your students wine and how to get rich on the internet.

Today we visit another phenomenon of cognitive misbehavior, what I like to call the Small Percentage Effect.  (It has some other fancy name among behavioral economists. I like mine better.)

Imagine that you have decided to buy the latest, totally cool and sexy, iPod. It retails for $200. You are about to pick it up at a shop near your home when you hear that all the way across town a store is running a one-day special promotion, selling this iPod for only $100. It is a 90 minute round-trip drive, but you gleefully head off to score your bargain iPod.

Unfortunately, after a while you realize that the iPod is not attracting nearly the number of members of the opposite sex that you expected. So you hatch Plan B, an even more totally cool and sexy convertible. The dealership near your house will let you drive it off the lot for $50,000. But then you find out that another dealership, coincidentally next to the place where you got the bargain on the iPod, will sell it to you for only $49,900.

Do you make the same trek across town to save $100 on the car? Most people would not, even though they would to save the same $100 on the iPod. Because people are idiots.

There are two things going on here. One is the natural tendency to think of things like discounts as proportions or percents, rather than as absolute amounts. The discount on the car is a joke, only 1/500 or 0.2% of the total. Most people think of it as being essentially zero. But the discount on the iPod, 50%, is worth getting excited about. Our brains are wired to think in terms of proportions like this. They just are.

(When people predict future downward pressure on mutual fund fees I tell this story about iPods and convertibles. The simple truth is that no matter how many dollars it translates into, hardly anybody will pick a fund because the annual fee is 0.25% lower.)

The other important pseudo-logical failing at work here is that people have trouble believing, or acting as if they believe, that all dollars are worth the same. The $100 saved on the iPod just seems more exciting and useful than the $100 saved on the car. You could use it to buy music to put on the iPod or you could buy a second iPod in another color. The money saved on the car, well, you could use it to start saving for the next car, or apply it to the purchase of some other large-ticket item. Not so exciting.

To a certain extent everybody mentally sorts expenditures like this. The only way to get our heads around the spending of our money on all the things we buy is to separate out the expenditures into buckets, for example housing, clothing, eating out, etc. Every person may have a different set of buckets, but dividing things up and then concentrating our efforts on allocating inside the buckets is the natural and practical approach.

The side-effect is that we have trouble relating savings in one bucket to things we might buy in another. An example from the behavioral economists illustrates this nicely.

Researchers found that people who move from cities with less expensive housing markets to more expensive ones, Toledo to New York perhaps, or vice versa, tend to spend the same on a house that they did in the old city. So a person going from Toledo to New York will squeeze the family into a tiny apartment and the one going the other way will buy a palatial mansion. It seems very likely that the new New Yorkers would be happier if they spent a little more on housing and less on everything else, just as the new Toledoans would be happier spending less on housing and more on the other stuff.

People are idiots.

A new-to-me blog called Pop Economics (which I found via Smart Spending – Thanks Karen) recently brought up a similar but more philosophical question. Are smarter people better with money?

At one level, it is a silly question. Does anybody believe the contrary hypothesis, that they are worse? More or less by definition, we consider smarter people to be a little quicker to pick up mental skills and gain wisdom. That is what smart means.

Obviously, we would not expect to find a perfect relationship between intelligence and money skills, that the rank order of everybody based on some sort of IQ test was the same as the rank ordering of everybody by financial acumen. This would be as implausible as a perfect correlation between intelligence and the ability to play chess or compose songs. All we are looking for is some kind of a positive relationship, that smarter people are, on average, better with their money. And it would be hard to imagine otherwise.

Pop Economics highlights two academic papers, the first of which, more or less, addresses this non-vexing question. It discusses the relationship between intelligence and two money behaviors, risk aversion and the need for immediate gratification.

The mechanics of the experiments in the paper are a little involved, but the bottom line is that the authors managed to tease out of subjects their preferences on two elemental aspects of investing. They found out how much a person would have to get paid to give up a 50/50 chance at 300 Euros. And they found how much they would have to be paid 12 months from now to forgo a 100 Euro payment today.

Lo and behold, subjects with higher IQ scores needed more money to give up the 50/50 shot at 300 Euros and less to give up the 100 Euro check today. From this the authors conclude that there is a relationship between cognitive ability and certain economic “preferences,” namely that smarter folks are less risk averse and more patient.

But these are not preferences. These are right answers and wrong answers. And, it turns out, the smarter folks were more likely to get the right ones.

Unless you are particularly poor, selling a 50/50 draw for 300 Euros for meaningfully less than 150 Euros is irrational and stupid. And what you should be willing to accept in a year rather than 100 Euros today is hardly a question of subjective taste. What are banks paying on 12 month CDs?

The fact that most subjects muffed these problems, average selling price for the 50/50 proposition appears to be about 100 Euros and subjects needed an average of around 127 Euros in a year to give up 100 Euros now, does not mean that these are matters of personality and behavior. It means that most people have not been taught how to deal with these problems and cannot work it out for themselves in real time.

The second paper in the Pop Economics post, by Jay Zagorsky of OSU, which sadly does not appear to be freely available on-line, addresses the obvious follow-on to the finding that smart people tend to make better money decisions. Are smart people richer?

In principle, this is a much easier question to answer. You do not have to set up experiments, you only have to survey folks, checking IQs and bank accounts. But the inevitable result, that smarter people tend to have more money, upsets Marxist professor types because it also implies that rich people are smarter. Nothing could be more ideologically objectionable than the idea that the rich are, even on average, more able than others.

Thus the headline for the press release about the paper reads You Don’t Have to be Smart to be Rich. To this I cannot keep from adding “but it helps.” You also don’t have to be beautiful to be a movie star or over seven feet tall to play in the NBA.

The paper does concede that higher IQ is correlated with higher income. But how much money you have is not, which leads its author to reassure readers of the press release that “Your IQ has really no relationship to your wealth.”

Since I am unwilling to reduce my wealth by the $31.50 that the publisher of the paper wants for a PDF, I am considerably hampered in my criticism of it. I don’t know what Zagorsky used to measure wealth, nor do I know the details of the not “statistically distinguishable” relationship between it and IQ.

But I do know this: the survey subjects were all between the ages of 40 and 47. For many of the high paying professions where you might expect to find the high IQ types, lawyering, doctoring, banking, and the like, the early 40s are just the beginning of the big earning years. You would not expect serious saving and wealth accumulation to have set in yet, so you wouldn’t expect these people to have a particularly high net worth. Yet. Ask again when they are 70.

More to the point, as I have argued several times before (e.g. here and here) saving, that is, wealth accumulation, early is life is often irrational despite being conventional wisdom. Indeed, there is such a thing as saving too much. (And let’s not forget this clever post.)  Having a nice pile of cash as a 45-year-old may not be a sign of being good with money at all. It could be evidence of having made a bad mistake.

In other words, although there is obviously a (complicated and non-linear) relationship between wealth and intelligence, in some cases being smarter than average doesn’t mean you are probably richer than average. It might mean you are poorer. For now.

To recap, a person is allowed to decide when to start drawing Social Security payments from the government. You can get them at 62, at 70, or anyplace in between. There is an obvious attraction to getting it sooner rather than later, and about 45% of those eligible choose to start getting the checks on their 62nd birthday.

The reason that the other 55% hold off is that the older you are when you start, the bigger the checks become. The payments for a person starting at 70 are about 70% higher than for a person starting at 62. (But relatively few hold out all the way until 70. The median age is 63.)

That trade-off, forgoing some years of payments to make the size of those payments bigger, sets up an interesting little finance problem which I discussed a year ago with the help of some annuity prices I found on-line. (It’s a good post. Here’s another link.)

The main conclusion from my analysis was that, unless you know you are likely to shuffle off your mortal coil earlier than actuarially expected, you should hold out until age 70. In other words, most Americans get this wrong.

But with the addition of a tidbit from the Smart Money article, I now realize that there is a good argument for starting at 62. I’ve known for a while that seniors can elect to “reset” the year they start taking benefits by paying back what they got before the new start date. So a 70-year-old who started getting checks at 62 can pay back eight years of benefits and start getting much larger checks from then on. What I didn’t realize, and what stupidly never occurred to me, is that the paying back is without interest.

The Smart Money article refers to this, in passing at the very end, as an interest-free loan from the government. I can’t remember a more deeply buried lead.

And it is more than just an interest-free loan. It is also a free option. The downside risk for waiting until age 70 to collect benefits is not subtle. You might not live that long. Kick off the day before you turn 70 and you get nothing. But start at 62 and you can have it both ways. Draw checks for eight years and if you are still in reasonably good health, pay it back interest-free and reset. If not, well, you got some money from the feds while you could.

The Smart Money piece does acknowledge this strategy, briefly, only to warn readers away from it. The objection, and it is not unreasonable, is that it relies on the government not changing the rules in the future. There is no guarantee that the Social Security Administration will always allow this interest-free loan option, so taking checks starting at 62 on the assumption you can pay it all back at 70 might be dangerous.

Anything is possible, and there is no question that this particular feature of the Social Security rules costs the government money it badly needs. But logic and reasonableness are not particularly useful when trying to predict government action. Reducing benefits for seniors is always a political challenge, and this is a government that could not bring itself to reinstate an estate tax for 2010.

Moreover, although it certainly costs the system money over time, it is one of those things that helps the current cash flow at the expense of the future. 70-year-olds hand over a pile of money in exchange for a modest monthly sum for the rest of their lives. The fact that this is a terrible deal for the government,  that the sums coming in do not justify the sums that will have to go out in the future is not the sort of thing that usually goes into the political calculus. In the short run, that is, before the next election or two, allowing seniors to reset makes the deficit smaller.

And finally, even if this loophole were closed, it would likely not be closed retroactively. Folks who started getting checks at 62 would probably have a grace period to hurry up and file to change that to 70 before the option went away.

So I will cautiously amend my advice from a year ago. The payments you get at 70 are still the best deal going, but if you can manage the risks involved, you might just be able to have it both ways. Get checks starting at 62 and then start over at 70.

Of course, for most investors, the fact that gold has done well lately is more or less the entire argument in favor of buying it. Subtle justifications are available, but, let’s face it, none of them are as powerful as the primal urge to join the party while you still can.

But when you get down to it, gold is one the more peculiar investments out there. Although it is an exaggeration to say that it is a substance of no intrinsic value, it has several industrial uses and would undoubtedly have many more if it were not so expensive, gold lacks some basic characteristics of a typical investment.

In particular, owning it promises no economic benefit other than the hope that you will be able to sell it later on for more than you paid for it. To be sure, that motivation is behind much conventional investing, but for most assets there is a background hum of economic rationale, a reason why somebody might want to own the thing even if it did not appreciate.

A stock is a share in a company and, by extension, a share in its profits. When you own a share of Apple, you own about $12 in annual profit. $250 may be a lot to pay for that, but nobody is going to suggest that Apple has no intrinsic value at all. Similarly, a bond will pay you interest for a number of years.  Real estate can be lived in, or farmed, or used for offices. Even fine art gives pleasure to those who admire it. (Or so I am told.)

Gold just sits there. If you buy actual coins and bars you can spend your evenings fondling it, but most investors today do not even get to do that. They purchase financial instruments that represent ownership of some gold in a dark vault deep underground somewhere.

The comparatively sophisticated argument in favor of gold is that it is the ultimate hedge against bad things happening to the rest of your portfolio. When it really hits the fan and panic sets in (e.g. fall 2008) gold goes up, and is often just about the only thing that does.

While this is certainly true as an empirical observation of what has happened in the past, it strikes me as a weak investment thesis. It relies too heavily on panicked investors following convention. People consider gold to be a safe haven investment only because they believe that everybody else does. If they start to doubt that and notice that gold is actually comparatively volatile and of marginal economic value, then the whole thing could come crashing down.

That has not happened yet, and I am not predicting it in the near future, but it is certainly possible and that possibility pretty well undermines the role of gold as portfolio lifeboat. And for all the recent excitement, the long term trend for gold as investment of last resort is negative. On an inflation-adjusted basis the recent peak of $1257 is still  below the $599 1981 peak, which comes in at about $1400 in today’s money.

A goldbug would probably argue that being under the 1981 high means there is more appreciation to come. I take the view that even in a financial dislocation that is by most measures worse than that of 1981, gold turned out to be less popular. That does not bode well for the next time ‘round.

And there is no shortage of ways to insure against meltdown. You could just short the market. ETFs are made for shorting. Or buy put options. Treasury bonds, particularly the inflation protected varieties, make good hell-or-high-water stores of value, and you get interest checks twice a year.

A long time ago, it may have been in 1981, I heard a radio interview with a “survivalist” expert giving advice on how to prepare for the immanent end of civilization. The interviewer asked if people should hoard Krugerrands. You could almost hear the survivalist rolling his eyes. He replied with something like “Look, there is no guarantee that anybody is going to want bits of shiny yellow metal. What you want to save up are useful things that are small, durable, and very hard to make by hand. I recommend razor blades. Gold just isn’t really worth anything.”

The SEC made its announcement within hours of the bill passing, while the stock market was still open. Generally, news like that is kept under a tight lid while the stocks concerned trade, ideally until early the next morning. But then the bill and the settlement would have been in different news cycles.

I must say, as an aside, that I am saddened by the settlement. The SEC’s case was largely imaginary and I am particularly irked by the $250 million going to a pair of European banks, apparently to compensate them for being idiots. I am sure that had Goldman gone to court it would have, eventually, won. But truth and justice are sometimes subordinate to good business. $550M is about two weeks of profit for Goldman, and if the deal comes with a gentleman’s agreement to be left alone for a few years then it was money well spent. Goldman’s market cap is up more than $5 billion on the news.

The presumably manufactured coincidence of the Goldman settlement and the financial reform package on the same day speaks volumes about the reform bill, likely the last memorable piece of legislation produced by this Congress, and possibly the last one from this administration.

For all the hue and cry about the evils of Wall Street and posturing by politicians of both parties, the law that finally got produced was a pallid collection of mostly cosmetic changes and vague promises of future regulation. It is so bloodless, in fact, that the administration announced the Goldman deal at the same time in order to conflate the two and give the impression that they were getting tough and doing something.

Those who assume the bill really is “stiff” might want to click on the link and actually read the content of the AP story. It anticlimactically begins:

In the end, it’s only a beginning.

The far-reaching new banking and consumer protection bill awaiting President Barack Obama’s signature now shifts from the politicians to the technocrats.

The legislation gives regulators latitude and time to come up with new rules, requires scores of studies and, in some instances, depends on international agreements falling into place.

In other words, do not be dismayed, ye true believers. The new law may not actually do much, but it empowers regulators to do things at some point in the future.

Off the top of my head, I can think of two big issues that this bill could have addressed but didn’t.

Fannie Mae and Freddie Mac were at financial meltdown ground-zero and are still an unresolved black hole for taxpayer money. But doing anything meaningful about them would have involved a discussion of government culpability in the fiasco and would have been particularly embarrassing to the party in power, traditionally the companies political patron.

The other great absence from the bill is significant reform of how the government deals with financial institutions in crisis. As somebody clever once put it, too big to fail is not a policy. But on this topic the folks in Washington were hampered by the problem that nobody seems to be able to think up a practical alternative.

Of course, that did not stop the politicians from doing all they could to give the impression that they had addressed the problem. There will be a new Financial Services Oversight Council made up of senior bureaucrats that will, as the AP explained a few weeks ago, “have the power to break up large financial firms if they pose a grave threat.”

That sounds helpful, but what does it really mean? Will the government break up any firm whose potential failure would be a systemic problem, i.e. anything too big? There are probably a dozen firms like that right now, and I am pretty sure that they are not going to be broken up by the feds any time soon. Or does it mean that the government will be able to intervene when large institutions are teetering on the edge of failure? And is that, in fact, anything other than an institutionalized too big to fail?

The 2300 page bill is largely an amalgam of cosmetic non-fixes and trivial changes to things unrelated to the great collapse. There will be a new Consumer Financial Protection Bureau, which will be a part of the Federal Reserve and will enforce the Fed’s consumer rules on large banks. If you are turned down for a loan, you will get a free peek at your credit score. Colleges, universities, and the federal government will be allowed to limit how many miles you get by charging tuition and taxes. And trading in movie box office futures will be banned.

If there is a consistent theme, it is that with regard to the bigger stuff the bill empowers regulators to fix problems in unspecified ways in the future. This is good news for the bureaucrats. Today’s story in the New York Times gives us a sense of the excitement inside the beltway.

Officials are already working to prepare for the expansion of government, including finding buildings in Washington to house the new agencies.

But even the Times, for whom the phrase “expansion of government” has no negative connotations whatsoever, ends its report with what sounds like the beginnings of doubt.

The legislation will be carried out mostly by the same federal workers who were on duty as the financial system collapsed. The new consumer bureau, for example, mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses.

Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.