Linda Lutton on Bush tax cut

[december]

*Originally posted by jshore *
** How come those on the Right who seem so concerned about “freedom of choice” don’t extend this concern to employees in private industry? I mean, I never hear complaints like “These companies are putting money into a pension plan for me whereas I think the correct thing for them to do is to give it to me for me to invest directly or do with it what I choose.” **

Good point. Actually my company has been gradually inceasing employee options. My 401k has a larger selection of investment funds. My pension plan just offered a one-time alternative of accruing money in two different ways. And, I will have several alternatives in how the pension is paid out.

One reason that private plans are better than government is that the private ones tend to evolve and improve over time. SS was state-of-the-art in 1936, but this thread shows how much resistance there is to modernizing it.

And, of course, I don’t even have to mention all the other lack of free speech and other shit from above we have to put up with.

This point deserves a thread of its own. Both the company and the government limit our speech in the workplace. In particular, sexual harassment laws have done a lot of good, but they also restrict speech.

Does the fact that we can always choose to jump from one employer to the next somehow absolve them from providing any freedom? [Hell, we can always move to a different country too, right?]

This is hardly parallel. We can’t just get citizenship or even permanent worker status in another country. (E.g., I met several people in Australia who were hopefully seeking permanent resident status there.) There are thousands and thousands of potential employers vs. a handful of countries. (Note that this is a good argument for governing more at the state level than the federal level. Moving from state to state is feasible and does provide some amount of personal choice.)

And, while one might try to make the claim that market forces will prevent employers from being too heavy-handed (which seems to fly in the face of reality…but never mind),

jshore, I’d be interested to hear some of the heavy-handed things you’ve experienced.

When I look at my own life, I find my freedoms more restricted by the corporation I work for (and other corporations that affect me) than by the evil government.

Maybe you’ve taken the government restrictions for granted. In particular, the government takes, say, 40% of your income in taxes. It’s like being born with ex-wife who always gets 40% of your money.

[pldennison]

*Originally posted by december *
**

Originally posted by jshore *
** How come those on the Right who seem so concerned about “freedom of choice” don’t extend this concern to employees in private industry? I mean, I never hear complaints like “These companies are putting money into a pension plan for me whereas I think the correct thing for them to do is to give it to me for me to invest directly or do with it what I choose.”*

Good point. Actually my company has been gradually inceasing employee options. My 401k has a larger selection of investment funds. My pension plan just offered a one-time alternative of accruing money in two different ways. And, I will have several alternatives in how the pension is paid out.**

Just adding a “me too.” My company’s 401k administrator, Great West Life & Annuity, has an enormous array of fund options, from high-risk, large-cap tech funds, to low-risk bond funds. I can allocate to as many funds as I want in whatever percentages I want, and I can change them as often as I want if the market makes certain portfolios undesirable. There’s an enormous amounf of flexibility. Here is the list of available options:

Profile Series 1
Profile Series 2
Profile Series 3
Profile Series 4
Profile Series 5
Fidelity Advisor Overseas T
Janus Worldwide
Putnam Global Growth A
Maxim Index European
Maxim Index Pacific
INVESCO Financial Services Inv
INVESCO Health Sciences Inv
Dreyfus Premier Technology Growth A
Maxim Ariel Small-Cap Value
Maxim Loomis Sayles Small-Cap Value
Orchard Index 600
Lord Abbett Developing Growth A
Maxim T. Rowe Price Mid-Cap Growth
Maxim Value Index
Putnam Fund for Growth & Income A
AIM Charter Fund A
Maxim Founder's Growth and Income
Orchard S&P 500 Index (R)
Fidelity Advisor Growth Opportunities T
AIM Weingarten A
American Century Ultra Inv
Janus Twenty
Maxim Growth Index
AIM Constellation A
Maxim Bond Index
Maxim US Government Mortgage Securities
Maxim Loomis Sayles Corporate Bond
Guaranteed Certificate Fund 36 Months
Maxim Money Market
Guaranteed Certificate Fund 60 Months

Not that I would argue on behalf of dismantling or privatizing SS completely–as a left-leaning libertarian, I fall solidly into the “undecided” camp on that one. But it’s simply untrue that corporate pension and retirement funds do not offer choice. There could, of course, be a cynical explanation–by putting the burden of choice on the employee, the company is off the hook if the employee screws up and loses all his money.

[panzermanpanzerman]

Kimtsu: <<<Sorry, but a universal social insurance program is not a party, and we are not required to go along with shaky and poorly-justified ideas for modifying it just so that we won’t “poop the party.”>>>

What idea regarding social security could possibly be shakier and more poorly justified than the primary, original assumption inherent in our own “pay-as-you-go” system? Namely, the assumption that the working population would continue to expand consistently in future generations.

This assumption has already been demonstrated to be completely false, and has been for 35 years. The riskiest thing we can do is to ignore the demographic fact, and to resist taking corrective action now.

The number of workers available to support a given retiree continues to decline rapidly. We already know the system is insolvent–the day is approaching when we will no longer run a surplus, and when we will have to make good on SS debts out of the general fund.

You want to talk about risk? Market risk I can understand and account for and mitigate using asset allocation and modern portfolio theory techniques. But I cannot hedge against or mitigate legislative risk.

If we do not increase the rate of return on social security investment, then we have only three choices: Decrease benefits substantially, raise taxes substantially (which amounts to the same thing), or scrap the whole thing altogether.

As I approach retirement age (in another 33-39 years, let’s say, I would like to adjust my portfolio to become less risky. The problem is that legislative risk my SS contributions are exposed to is severe–far more severe, in my view, than any historically justified market risk, not least because under the current SS system, as unfunded liabilities mount and become due as the years pass, that legislative risk INCREASES as I get closer to retirement age. Market risk does not.

You seem to be railing against assuming market risk versus assuming no risk, as if SS were some sort of guarantee. It is not. Benefits have already been rolled back, and taxes raised several times, most recently by Bill Clinton, when he raised taxes on SS benefits in 1993.

It is fashionable among adherents of the Pay as you Go system to ignore legislative risk and pretend it does not exist. But we know it exists. It’s already reared its head more than once. And it’s the reason we’re having this discussion in the first place.

I think it’s time to “embrace the horror” of the demographic changes, and it’s time for opponents of any sort of privatization to come up with serious alternatives that will eliminate legislative risk. I don’t think there’s any solution to that problem which doesn’t involve privatization: the demographic trends are just too powerful.

[Kimstu]

pman2: *What idea regarding social security could possibly be shakier and more poorly justified than the primary, original assumption inherent in our own “pay-as-you-go” system? Namely, the assumption that the working population would continue to expand consistently in future generations. […]

I think it’s time to “embrace the horror” of the demographic changes, and it’s time for opponents of any sort of privatization to come up with serious alternatives that will eliminate legislative risk. I don’t think there’s any solution to that problem which doesn’t involve privatization: the demographic trends are just too powerful.*

This seems to be basically a red herring/scare tactic offered by privatization advocates to shore up the notion that privatization is the only possible solution (thus deflecting attention from its practical disadvantages). Actually, discussions of Social Security have taken into account the demographic changes you speak of for at least the past couple decades: this is not news. Moreover, of course you don’t need the working population to “continue to expand” relative to the non-working population in order to establish a solvent pay-as-you-go Social Security. Even when the working population temporarily contracts relative to the non-working population, as will happen with the retirement of the baby-boomers, it’s nowhere near as disastrous a situation as many privatization advocates try to make out.

It’s true that a likely shortfall in expected benefits is predicted after about 2032 if there are no changes made in the existing system, but the unchanged system would still be able to provide about three-quarters of the expected benefits. And a partial privatization plan would not substantially reduce that shortfall, even if the rosiest projections for its performance were realized. (Also, bear in mind that the large percentage of elderly baby-boomers in the population is not a permanent demographic state; as they are replaced by the subsequent “baby-bust” generation, the ratio of workers to non-workers grows again.)

So if you’re really looking for “serious alternatives” to privatization, and not just declaring for rhetorical purposes that there aren’t any, there are plenty of places to look for them. A good place to start is the Century Foundation’s Social Security Network.

[Kimstu]

If you really want to avoid what you call “legislative risk”, i.e., the risk of having SS taxes raised or benefits cut in order to cover shortfalls, you ought to be running screaming in terror away from all the partial-privatization plans currently proposed. Because they don’t just “risk” such additional financial burdens, they actually demand them in order to cover conversion costs from a totally pay-as-you-go system to a partial pay-for-yourself system. Retain pay-as-you-go SS and yes, you may well be seeing some tax increases and/or benefit cuts twenty-five to thirty-five years down the road (though as noted in the sources I linked to, there are alternative strategies such as lifting the income cap or means-testing benefits). Privatize, and you will be seeing substantial tax increases and/or benefit cuts now.

[jshore]

*Originally posted by december *
Actually my company has been gradually inceasing employee options. My 401k has a larger selection of investment funds. My pension plan just offered a one-time alternative of accruing money in two different ways. And, I will have several alternatives in how the pension is paid out.

God, december, for a second there, I was wondering if you worked for the same company as me…but your profile suggests probably not. My company recently had a one-time option to convert from a traditional pension plan to one of these “cash balance” plans. I took the cash balance, but it occurred to me that the way they handle it doesn’t give me freedom of choice of what to invest in … They just put a certain % of your salary in an imaginery account and credit it at some Treasury rate. I must admit that I am really playing devil’s advocate here as I am not unhappy with this arrangement (and in fact think that the company’s handling of the conversion option was perhaps the best product I have seen come out of the bowels of our company’s bureaucracy). But, then I’m not unhappy about SS either.

Our 401K does offer lots of choices, although it is slightly annoying to me that none among them are so-called “socially responsible” funds, which (despite their deficiencies) I would be more comfortable with.

Is it really true that SS hasn’t been modernized over time? Certainly, it has been fiddled with somewhat. No dramatic change…but then, it’s purpose and motis operandi make it fairly different than a private plan.

This is hardly parallel.

Sure, it’s not a perfect parallel. On the other hand, there are some advantages I enjoy in a governmental arrangement that I don’t enjoy in an employment arrangement…like the ability to have the leaders be held accountable to the public [employees] via elections. I fantasize about getting to vote out the current management in our research labs!

It’s an interesting question the extent to which market forces allow employees (and consumers) true freedom of choice. All that I can say, speaking as an employee and a consumer, is that I feel forced into situations I don’t really want to be in in a lot of cases. The supposed “freedom of choice” that I have seems pretty theoretical to me. How that effectively happens would be a good subject for a PhD dissertation in economics, I suppose.

(Note that this is a good argument for governing more at the state level than the federal level. Moving from state to state is feasible and does provide some amount of personal choice.)

Well, only if you buy into the belief that this open market really leads to that much more freedom. Also, as I pointed out in other threads, this sort of devolving of powers often leads to a divide-and-conquer strategy on the part of corporations, giving them the power to blackmail states into making lax environmental laws, giving generous tax subsidies, etc. So, while I do think it is important to handle what can be handled well at a more local level, I am leery of this devolution and the true motives of some who are behind it.

jshore, I’d be interested to hear some of the heavy-handed things you’ve experienced.

Are you sure that you really want to hear this tirade?!? It’s basically stupid decisions imposed on us in regard to issues like security, document and e-mail retention, “information technology”, etc. And, it’s the general feeling of helplessness at not being able to really make voices heard in complaining about this back up to management. [We can complain to our boss, but he is pretty much on our side and about as helpless as us to do anything about it as we are. More occasionally, we can complain to his boss (a two person team)…who are, I believe, still basically good people but are getting pressed in lots of different directions and are dangerously close to the abyss I’ve taken to labeling “the great disconnect with reality”. Beyond that level, the management is inaccessible to us and apparently way beyond the abyss.]

Maybe you’ve taken the government restrictions for granted. In particular, the government takes, say, 40% of your income in taxes.

Yeah, well, it’s sort of interesting because I hear people get so worked up about this but somehow it really doesn’t irritate me. Can’t completely explain why. One is perhaps the fact that I see it as necessary to enjoy the benefits of a society that we have. The second, I suppose, is my general feelings regarding money and material goods that just don’t lead me to get as riled up about money issues as about other issues. I suppose this carries into work too since there are folks at work who complain not only about the bureaucratic b.s. that drives me up the wall but also about the pay and benefits not being as good as they should be…whereas I have no complaints about that part. In fact, after making the transition from grad student and postdoc, I am sort of still an awe about how much money they are paying me and have yet to figure out what to do with it all.

[december]

*Originally posted by Kimstu *
pman2: *I think it’s time to “embrace the horror” of the demographic changes, and it’s time for opponents of any sort of privatization to come up with serious alternatives that will eliminate legislative risk. *

This seems to be basically a red herring/scare tactic offered by privatization advocates to shore up the notion that privatization is the only possible solution (thus deflecting attention from its practical disadvantages). Actually, discussions of Social Security have taken into account the demographic changes you speak of for at least the past couple decades: this is not news.

Kimstu, your comment that discussions of SS have already taken into account demographic changes indicates that you haven’t grasped their full magnitude.

Social Security originally had something like 15 or 20 people paying in for every one collecting. As a result, adequate benefits could be paid with minimal assessments. This ratio has been dropping with the aging of the population. The movement of women into the workforce almost doubled the working population, which helped balance SS. But, looking forward, this ratio will drop to 3 to 1 and well below over the nest century. As a result, to pay generous benefits, we’ll need huge assessments. And, note that Americans are choosing to retire younger, compounding the problem.

Furthermore, Medicare is now paying out more than it’s taking in. Not only is Medicare facing the same demographics as SS, but also medical care cost rises faster than inflation and prescription drug benefits will add significant cost. Think about what it will mean when every working person has to pay 40% of the SS retirement and medical cost of an elderly person, as well as support her own family and the rest of the taxes.

Given these demographics, SS as we know it cannot survive. The question is what will replace it? Given the lobbying power of the elderly, it’s not inconceivable that SS and Medicare will remain at the same level, with the elderly gobbling up money for most other social programs. I think this would be unfortunate.

kimstu, there’s nothing magic about the year 2302. The ratio of workers to retirees will continue to drop for decades past 2032. The imbalance will grow worse and worse. Dishonest advocates mention that year as if typified the problem as a way to trick naive people.

…but the unchanged system would still be able to provide about three-quarters of the expected benefits.

This statement has no meaning without specifying a point in time. A pay-as-you-go system will be able to provide less and less of today’s benefit levels as time goes by.

Why do you continue to quote approvingly ideologues whose statements are so imprecise? Doesn’t some alarm bell go off in your head when you read “parsed” statements by people with an axe to grind?

And a partial privatization plan would not substantially reduce that shortfall, even if the rosiest projections for its performance were realized.

This statement looks wrong. Do you have a cite? I think money set aside earning 10% (the long-term average stock gain) could provide a generous retirement.

(Also, bear in mind that the large percentage of elderly baby-boomers in the population is not a permanent demographic state; as they are replaced by the subsequent “baby-bust” generation, the ratio of workers to non-workers grows again.)

I don’t think this correct. My impression is that with increasing life spans, the ratio of workers to retirees will continue to decline into the foreseeable future. Do you have a cite or some support for your projection?

Thanks for the link to the Social Security Network. On briefly looking at it, I note that:

– the contributors include some well-known economists
– they’re leftists
– they link to lots of other good sites
– there’s a remarkably stupid error on the linked page. It says:

It is not possible to create individual accounts without either cutting benefits or raising taxes.

The reason is very simple: present retirees are dependent on payroll taxes from current workers for their support because Social Security was designed as a pay-as-you-go system. Advance funding of future pensions is therefore impossible without additional funds from either new taxes or lower benefits.

I will leave it as an exercise to the reader to spot the error.

[panzermanpanzerman]

<<This seems to be basically a red herring/scare tactic offered by privatization advocates to shore up the notion that privatization is the only possible solution (thus deflecting attention from its practical disadvantages).>>>
It is the only possible solution without increasing the tax burden on younger workers and/or slashing benefits.

<<<Actually, discussions of Social Security have taken into account the demographic changes you speak of for at least the past couple decades.>>>

Oh yeah? Then how is it we have an unfunded liability of 731 trillion dollars which we already KNOW we can’t pay? That doesn’t even count future workers. You’d think if we’ve already taken it into account over the past couple of decades we wouldn’t be looking insolvency squarely in the face.

<<<Even when the working population temporarily contracts relative to the non-working population, as will happen with the retirement of the baby-boomers,>>

I’ve seen no evidence that the baby bust is a temorary phenomenon. Every graph I’ve seen has the number of workers per retiree continuing to contract through 2075 or so (beyond which time we have no clue what will happen, as those retiring beyond that time have not yet been born.)

Sure, the rate of contraction begins to slows somewhat after, say, 2060. Cold comfort. The system will have already very likely imploded

<<<It’s true that a likely shortfall in expected benefits is predicted after about 2032 if there are no changes made in the existing system, but the unchanged system would still be able to provide about three-quarters of the expected benefits.>>>

Cool. So we already know off the bat that this program will lose 25% by that time. Given that fact, NOT transitioning it to a fully funded model it strikes me as a pretty stupid idea.

Folks, stocks are risky, sure. But they ain’t gonna lose 25% over the next 31 years.

<< And a partial privatization plan would not substantially reduce that shortfall, even if the rosiest projections for its performance were realized. >>

Nah, that’s clearly false. Currently, Social Security replaces, on average, 42% of income at retirement. If “the rosiest” scenario comes to pass, meaning 2% of workers’ wages are invested at an average 10% rate of return for the next 32 years, the replacement level is two-three TIMES that percentage.

Well, that’s quite a lot of maneuvering room.

<<< . Because they don’t just “risk” such additional financial burdens, they actually demand them in order to cover conversion costs from a totally pay-as-you-go system to a partial pay-for-yourself system. >>>

Well, not transisioning to a funded model is the surest road to an additional financial burden. You said so yourself–we already KNOW we’re going to have a 25% shortfall by 2032.

At MOST, the Bush plan will require replacement of 2% of payroll, or 14% of payroll taxes, since that’s the maximum you could contribute to the private portion of the plan. Which is a bigger burden? 14% or 25%?

Except it won’t even be 14%, since not everyone would elect to invest in the private option.

<<<you may well be seeing some tax increases and/or benefit cuts twenty-five to thirty-five years down the road (though as noted in the sources I linked to, there are alternative strategies such as lifting the income cap or means-testing benefits).>>>

In other words, slashing benefits. Call a spade a spade.

<<< Privatize, and you will be seeing substantial tax increases and/or benefit cuts now.>>

Not sure that’s true. If it is, cool. We’re running a surplus. Now’s precisely the time to do it.

[CyberPundit]

Sigh it’s pretty clear that the long explanations by Tejota and me have had no effect.

Let me repeat: the higher historical returns on stocks are a red herring. if privatization doesn’t raise the growth rate in the economy.

If you believe that SS is unsustainable fine; but please don’t pretend that privatization is a solution unless you are willing to explain how it increases the growth rate of GDP and by how much.

December,
I have been trying to keep my temper in this debate but you really to stop your circus-act of accusing respected economists of lying or being wrong when it is clear that you understand very little about the economics (as opposed to the accounting) of the issue.

The first thing that you have to realize is that the debate is not about the accounting numbers in the " trust fund" or which assets have higher historical returns but about which SS regime helps the real economy grow more and specifically which regime helps capital accumulation. If you don’t believe this perhaps you would care to provide arguments to the contrary from a respected economist?

If you look at the plans of privatization-supporting economists like Feldstein you will see that they make fundamental assumptions that privatization will increase the savings rate and growth substantially in the economy. It just so happens that the majority of economists consider this far-fetched.
This is a good article which examines his proposal:
http://www.cbpp.org/12-16-98socsec.htm

Footnote 8 is especially important. Anyway the main point is that you are debating all the wrong things.

[december]

*Originally posted by CyberPundit *December,
I have been trying to keep my temper in this debate but you really to stop your circus-act of accusing respected economists of lying or being wrong

Not to mention the Executive Editor of the NY Times. As a widely publshed actuary (albeit not in the pension field), I believe I understand SS as well as Krugman, and I’m sure I know how to write accurate, accessible technical articles. PK’s articles are not dispassionate analyses; they are one-sided debates. They take advantage of the fact that most readers don’t have the technical knowledge to find the flaws in his arguments.

I’ve been involved in some contested rate hearings where the occassional actuary has used similar sorts of tricks. For us, it’s a serious breech of ethics. For the NY Times, it’s SOP. Read the Archives of http://www.smartertmes.com and you’ll see what I mean.

The first thing that you have to realize is that the debate is …about… about which SS regime helps the real economy grow more and specifically which regime helps capital accumulation.

I remain mystified by this statement. Sure, the Bush plan encourages capital formation, which may help the economy. But, I disagree that this point is what the debate is about. A lot of other issues are a lot more important.

If you look at the plans of privatization-supporting economists like Feldstein you will see that they make fundamental assumptions that privatization will increase the savings rate and growth substantially in the economy. It just so happens that the majority of economists consider this far-fetched.
This is a good article which examines his proposal:
http://www.cbpp.org/12-16-98socsec.htm

Thank you for the cite. It demonstrates that there’s controversy over how much private accounts will benefit the economy. Note that Footnote 8 does not disagree with MF that private accounts will benefit the economy; it merely disputes the magnitude of the benefit.

Anyway the main point is that you are debating all the wrong things.

How do you support this statement? Why are you so passionately certain? Where’s your cite?

[december]

I must admit that PK’s column today in the Times is OK. http://www.nytimes.com/2001/08/26/opinion/26KRUG.html
It explains that the SS “lockbox” is mythical, and that “tapping the SS funds” has no meaning other than, “run a budget deficit.”

[CyberPundit]

December,
I think Tejota and I have already explained at some length why it is the real economy and its growth that matters. Think of it this way: presumably the point of saving SS is that retirees in the future have a higher income in the future ie a higher capacity to consume goods without correspondingly reducing the income or consuming capacity of non-retirees. Now who is going to produce those extra goods? If there isn’t additional productive capacity then higher rates of accounting return will prove illusory one way or another in terms of improving standard of living. This isn’t assertion but the very essence of economic logic about there being no free lunch.
About the higher savings one reason that the magnitude matters is the vast increase in transactions costs, another is that taking away dollars from debt-reduction will reduce the capital stock. For privatization to pay, the increase in capital accumulation will have to be large enough to overcome these two factors.

[panzermanpanzerman]

CyberPundit: <<<Let me repeat: the higher historical returns on stocks are a red herring. if privatization doesn’t raise the growth rate in the economy.>>>

Repeat it all you like; it won’t make it true, or relevant. In order for your statement to be true, you will have to assume that diverting 2% of payroll from government spending directly to capital investment is no more conducive to wealth creation than government pork barrel spending itself.
Even more absurdly, you have to assume that government spending allocates wealth no less efficiently than capital markets.

While I don’t regard Wall Street as particularly efficient, it is certainly a great deal more so than the labyrinth of bureaucracies in Washington D.C.

<<<but please don’t pretend that privatization is a solution unless you are willing to explain how it increases the growth rate of GDP and by how much.>>>

It needn’t increase the growth rate of GDP in the short term (although in the long term, say, 30 years from now, by saving us from 731 trillion dollars in unfunded liabilities, it will enable us to substantially decrease taxes (compared to what they would have been otherwise) which will almost certainly have a positive effect on GDP.

If the long term rates on equities continue as they have been for the last 70 years, return on investment for these dollars to 10% from a current net return on Social Security contributions of zero. (Why zero? Because the money required to pay the interest on these treasuries is extracted from the taxpayer, anyway.)

Subtract 1% from that 10% figure for expenses, and you have a spread of 9%. Those who prefer investing in, say, a bond fund, might see a return of 5-6% over time. Most people will allocate parts of their portfolio to both, with a net resulting average long term return of somewhere between 5% and 9% over and above Social Security. But thanks to the dual allocation, privatization overall will be substantially less risky than the stock market’s S&P 500 proxy.

For an example on how market risk can be mitigated by diversifying across stocks and bonds, go to http://www.riskmetrics.com, and enter a portfolio consisting of, say, the Vanguard Total Stock Market Index Fund, another consisting of the Vanguard Total Bond Market Index Fund, and then a portfolio consisting of a 50/50 spread between the two, or 45/45 + 10% cash/money markets.

(A 50/50 portfolio is only half as volatile as the stock fund alone)
So the fearmongering tactics of those who have a kneejerk aversion to market risk in spite of the substantial demographic challenges are shown to have a lot less weight when subject to scrutiny.

A portolio of treasuries outside the current SS plan is likewise less risky than one inside SS, for the simple reason that it is not nearly so subject to legislative risk, while providing (by definition) equivalent returns to the shareholder. It is also far less subject to the risk of vanishing upon his death–the portfolio can be passed onto his heirs, unlike that of Social Security in its present form–a feature which substantially benefits widows and orphans of retired workers.

[CyberPundit]

“diverting 2% of payroll from government spending
directly to capital investment”
It’s being diverted from paying down the debt which reduces long-run interest rates and stimulates investment. If money is diverted from this that will obviously do the reverse which will cancel out the effects of additional funds for the stockmarkets.Furthermore all the privatization plans like Feldstein envisage that there will be a period of several decades where the government will have to borrow to fund SS payments which will crowd out more investment. Besides its important to note that it’s Feldstein et al who make the assumptions about higher growth which make their plans work. They aren’t fools to believe that you can get something out of nothing just by repeating “higher historical return” again and again.

Anyway it is quite bogus to use historical returns to guess what future market returns will be. If there is a big increase in the supply of funds to the stock markets there will be a decline in long-run returns. The benefits will go to the existing holders of stocks who will see a big one-off increase in price. By and large these are the wealthy.
Also there is evidence that investors over the last ten years have been demanding less in the way of a risk-premium to hold stocks a logical outcome of which is that the return
in future periods will fall.

Privatization won’t reduce legislative risk. If the stock market underperforms then the government will have to step in and make up losses.

[december]

*Originally posted by CyberPundit *
** Furthermore all the privatization plans like Feldstein envisage that there will be a period of several decades where the government will have to borrow to fund SS payments **

Way to go, CP. You have found the error in the quote from the Century Foundation’s Social Security Network, which said:

It is not possible to create individual accounts without either cutting benefits or raising taxes.

The reason is very simple: present retirees are dependent on payroll taxes from current workers for their support because Social Security was designed as a pay-as-you-go system. Advance funding of future pensions is therefore impossible without additional funds from either new taxes or lower benefits.

Note that borrowing to cover the private investment funds would be offset by a reduction in SS unfunded liability for future benefits.

[CyberPundit]

December,
I can assure you that no economist is unaware of the possibility of borrowing. In fact it is one of the main criticisms of the Feldstein plan that it will require substantial borrowing.

BTW that is one reason why contrary to what you said privatization is less politically acceptable than simply investing SS surpluses in stocks once the debt has been paid down. There is a substantial aversion to big deficits on the part of the American public. The Bush people have to tried to evade this by simply pretending that there won’t have to be any borrowing and that in effect the benefits of privatization is like a free lunch where you get something for nothing. I doubt they can continue fooling people for long.

Of course the more important point is that this massive borrowing will greatly reduce any benefits of privatization and quite likely eliminate them entirely once you take into account the higher transactions costs of private accounts.

[december]

*Originally posted by CyberPundit *
**December, I can assure you that no economist is unaware of the possibility of borrowing. **

I’m sure you’re right, CP, but the site Kimstu recommended said what it said. See: http://www.socsec.org/facts/index.htm
I don’t know why it made such an obvious mistake.

[CyberPundit]

Probably they were just implicitly assuming that there would be no borrowing. Anyway if privatization doesn’t raise the growth rate significantly , and many economists don’t believe it will, they are right that either taxes have to be raised or benefits cut in the long run.

If you have trouble understanding it; look at this way; the fundamental problem with SS is that the ratio of workers to retirees is going to fall. The important thing to realize is that even if there was no SS this would tend to lead to a fall in standard of living for either the workers or the retirees as a matter of basic arithmetic because the pie produced by the workers has to be divided among more people.In a purely private system you would have less children to take care of parents so either one or the other party would suffer economically.

Now there are two basic ways of changing this ; either increase the ratio back or increase the productivity of the workers. The most straightforward way of raising productivity is increasing capital per worker. So the basic question with any SS reform is : does it make workers more productive by increasing capital per worker or does it change the ratio of workers/retirees? Anything else is pretty much just accounting window-dressing which just shifts around the distribution of the pie .

Many economists are skeptical that privatization will increase productivity significantly so it becomes just another plan for redistributing the pie with the added disadvantage of higher transactions costs. You can just as easily do that with the existing system without privatization.

[december]

*Originally posted by CyberPundit *
**Many economists are skeptical that privatization will increase productivity significantly so it becomes just another plan for redistributing the pie with the added disadvantage of higher transactions costs. **

Just as a point of logic, it’s possible that an insignificant increase in productivity might still be a lot bigger than the transaction costs. It demends o what’s meant by “significant.” In fact, I challenge you to find a cite saying that the increase in GDP would be less than the admin costs.

Just about every major employer in the US is running a group of investment funds like the ones Bush has proposed, so it’s clear that these transaction costs aren’t that high. If they can do it, Uncle Sam can do it.

Isn’t it obvious that modern-day computers make it very efficient to handle this sort of thing? There would be a fairly small number of funds, each of which would require invementment management. It doesn’t take many people to manage a fund. Participants would hold shares of various funds. The computers keep track of shares and values. This is a piece of cake.

[CyberPundit]

Well it’s not just the transaction costs but also the crowding out effect for the period that the government is borrowing. Considering that the transactions costs are about 20-30% of the total over the lifetime of the account,the higher level of growth in the economy would have to be fairly significant though offhand I can’t give you hard numbers.
And IMO it is the people who want to change the status-quo who have the burden of proof both when the policy-change increases or decreases government.