Monday, February 07, 2005

Social Security Meta-Archive: 2004

[Part of The Earth-Based Initiative: Social Security Meta-Archive]

A Progressive Framework for Social Security Reform
A Center for American Progress production with presentations by Gene Sperling and Dean Baker.
The Clown Show that Is Bush Administration "Social Security Reform" Opens
Brad DeLong links to Kash of the American Street, followed by extended comment.
Saving Social Security
Diamond and Orszag present Saving Social Security at AEI. With video and other multimedia.
01:23 PM
Hell Is Briefing George W. Bush on a Complicated Issue Like Social Security Reform
Brad DeLong examines the latest document in the hopper at Ron Suskind's website.
4:27 PM PT
The Free Lunch Bunch
Ron Suskind on the the "Lindsey Plan" to issue new debt financed by private plan revenues back in 2001.
Saving Social Security
DeLong examines the arguments presented in the Suskind article.
The Biggest Risk-Arb Transaction Ever
Brad Delong reports on eight estimates of the Larry Lindsey-Feldstein-Samwick plan which has influenced Bush administration thinking:
The plan, you remember, was for the federal government to sell a huge number of Treasury bonds, invest the proceeds in stocks, distribute the stocks to individuals as their Social Security Private Accounts, and use the equity premium--the average spread on the return on stocks over the return on Treasury bonds--to reap immense profits and save Social Security.

Of the eight back-of-the-envelope point estimates:

Two say zero: even though there was a substantial equity premium in the past, there is no compelling reason to think that the risk-adjusted equity premium will be large in the future. And policy should not be made on the gamble that it will.

Two more say zero: even though there is compelling evidence that the equity premium is excessively high from the government's perspective--that the government is so risk-tolerant an institution that the expected risk-adjusted profits from the government's going short Treasuries and long stocks--the Lindsey-Feldstein-Samwick plan transfers the risk that the stock market will tank from the government back to Social Security beneficiaries, and there is no compelling reason to think that beneficiaries have enough risk tolerance to make this a good tihng to do.

Two more say zero: even though there is compelling evidence that the equity premium is too high and that there is lots of profit to be earned by long-run bets that go short Treasuries and long stocks, enactment of the Lindsey-Feldstein-Samwick plan will cause an immediate jump in the stock market. Current owners of stock will profit massively as people's expectations of the massive future demand from Social Security Private Accounts. The equity premium will shrink quickly. And there will be little profit captured by beneficiaries and little money to save Social Security. (However, the falling equity premium will boost corporate investment, real profits, and real wages by eliminating the Harberger triangle currently created by the market inefficiency underlying the excessive equity premium.)

One says that you might make $2.4 trillion in present value--that price pressure from the demand for stocks for Social Security Private Accounts will eventually shrink the excess equity premium to close to zero, but that will take a generation. And in the meantime, as the excess equity premium is still there (but shrinking), you do profit from the wedge caused by the fact that the private stock market grossly overprices systematic risk.

One says $12 trillion. In his view Lindsey-Feldstein-Samwick are probably right. The world capital market of the twenty-first century will be much bigger than the U.S.-centered capital market of the twentieth century. The equity premium appears to be a persistent structural feature of the world economy. U.S. Treasury bonds will be an immensely attractive investment to the rich of industrializing Asia (as a form of political risk insurance if nothing else). Given these considerations the Lindsey-Feldstein-Samwick belief that the Treasury can go short $4 trillion of Treasuries and long $4 trillion of stocks and earn huge profits does not look unreasonable. He says that you might well make $12 trillion in present value profits on this most mammoth of risk-arbitrage transactions. And that is in the ballpark of being enough money to pay current-law Social Security benefits without increasing Social Security taxes.

My own view? I'm half in the "about $2.4 trillion of profit" camp, half in the "this is no bargain if the risk the stock market will tank is borne by beneficiaries" camp.
And further comments in the subsequent thread:
Re: "Is there someplace where a mathematically literate (but helas non-economist) individual e.g. me, can follow this conversation? Its content is more than a mere technical curiosity and I would like to be reasonably informed about it. I understand what the Lindsey-Feldstein-Samwick proposal is, but I don't have the background to judge the risk factors of the various portfolios."

There really is no place to follow this discussion, alas...

Feldstein and Samwick have written various NBER working papers on this: Peter Orszag at has run similar numbers for his book on Social Security reform with Peter Diamond, but Orszag is in Florida right now on a no-cell-phone vacation. Bob Cumby at Georgetown explored these issues during the late Clinton Treasury, and is looking through his files. John Karl Scholz at Wisconsin and Kent Smetters at Pennsylvania are people I need to talk to about this, and haven't.

On what to do with Social Security, I favor putting Peter Orszag and Kent Smetters in a locked room without food (but with plenty of caffeinated and other beverages), and doing whatever they manage to agree on.
With subsequent commentary by Robert Waldman:
risk soudning like a broken record (and besides Brad made this point

The Lindsey-Feldstein-Samwick has two components. The first is social security private acocunts (SSPA). This might be good for participants, but would cost the SSA on the order of 1 trillion. The thought that this is the first step in saving social security is crazy. The grim fact is that Bush wasn't dishonest when he stated that thought.

The other is the SSTF investing in private assets especially stock. This appears via a tax on ss private accounts. Now it might be socially useful for the SSTF to go long in stock if there wree still a puzzling equity premium. There is no logical connection between the two aspects.

It is easy to convince people they could do better with private accounts if you "neglect" to mention the tax on returns of private accounts. I'd say Lindsey-Feldstein-Samwick are trying a major bait and switch, arguing that private accounts are a great deal for particpants because they get to take 1 trillion from the SSTF (don't mention the tax) and a great deal for the SSTF beaxue it will get to take N trillion in taxes from the participants. My sense is they plan to save the SSTF with fraud.

Why would I accept a taxed SSPA rather than keeping my social security pension and buying stock on my own ? That way all is the same except the SSA gets less from me. The SSPA would be a rational investment only for the liquidity constrained and those excluded from the stock market by borkerage fees on odd lots of index funds.

The N trillion for the SSA would come mostly from cheating people who don't understand that they are principally signing on to pay a brand new tax.
And Jim Glass:

"One says that you might make $2.4 trillion in present value--that price pressure from the demand for stocks for Social Security Private Accounts will eventually shrink the excess equity premium to close to zero, but that will take a generation."

Over the last 20 years $11 trillion additional went into private retirement accounts such as IRAs. The capitalization of markets available for that to be invested in was much smaller 20 years ago than today -- and certainly much much smaller than the world-wide markets of 20 years from now.

Why would a much smaller new "pressure" of a mere $2T in the future have a such dramaticaly greater effect on the equity premium than the much larger new pressure in the past? Nobody has ever explained this to me.

And the equity premium has existed for at least 200 years, puzzle or not. Grant that someone truly believes it must go away "sooner or later". What objective *reason* can such a someone give to explain why "sooner or later" will arrive within the next 20 years? I mean a reason that also explains why it didn't arrive in 1960 or 1920 and won't delay its arrival until 2110?

Think Again: Spinning Social Security
Matthew Yglesias, writing for the Center for American Progress on the under-reported brazen Social Security hypocrisy of Alan Greenspan.
The Outlook for Social Security
CBO analysis.
Reducing Budget Deficits
"Remarks by Edward M. Gramlich Member Board of Governors of the Federal Reserve System at the Concord Coalition Policy Conference Dirksen Senate Office Building Washington, D.C."
Marty Weitzman Is *Much* Smarter Than I Am
DeLong samples a paper on the equity premium.
Dazzle Them With Demographics
James Galbraith reviews The Coming Generational Storm by Laurence J. Kotlikoff and Scott Burns in the Texas Observer.
Fact vs. Fancy: The Skinny on Social Security[PDF]
Martin Feldstein, writing in The Wall Street Journal:
Reforming Social Security finances is the major domestic challenge that the president will face in the next four years...
Are There Reasons to Be in Favor of Social Security Privatization?
In response to Atrios, DeLong responds affirmatively:
There are five reasons to be in favor of Social Security privatization. They are:
  1. There are large-scale financial market failures which cause the equity premium to be *way* too high: the stock market does a lousy job at mobilizing society's risk-bearing capacity as applied to investment. Privatizing Social Security and mandating that such accounts be invested in stocks rather than holding the public Social Security Trust Fund in Treasury bonds is a powerful way to try to repair this market failure by boosting demand for equities
  2. Too many households are myopic: they do not save enough. Households resist increases in Social Security taxes--they see no link between the taxes and their future benefits. But if Social Security were privatized so that households saw their Social Security contributions as their own, in the future there would be much less objection to upping the contribution rate--and so creating a real and more effective forced saving program to raise the national savings rate.
  3. Prefunding Social Security is moral: it is unfair to make tomorrow's young bear the entire burden of financing the retirement of the baby-boom generation. But prefunding requires raising Social Security contributions and building up huge assets in the Social Security Trust Fund--enough assets to give the Managing Trustee of the Trust Fund effective voting control over corporate America. The Managing Trustee is the Secretary of the Treasury. Do we want the Secretary of the Treasury casting the deciding votes in every election for corporate boards of directors? No. Hence privatization is a necessary first step to create the possibility of doing the moral thing--making the boomers build up the assets needed so that they can shoulder a greater share of the burden of financing their own retirement.
  4. We need to raise our national savings rate. But if we just raise Social Security taxes, Congress will treat these taxes as general revenue and spend them. Only by funneling Social Security contributions into some vehicle that Congressional representatives cannot interpret as a resource available to fund current spending can we raise the national savings rate. And private accounts are the best vehicle we can find to (a) accumulate contributions without (b) allowing Congressional representatives to seize them as resources available to fund current federal spending.
  5. At present, your Social Security benefits are yours only by grace of Congress: Congress could cut them if it wished. But if your privatized Social Security account were *yours*, then it would be yours not by grace of Congress but by right of property: courts would stand ready to defend it against any casual attempt to cut or confiscate it.
The problem is that I cannot see any of these as a reason for George W. Bush to be in favor of Social Security privatization. (It does seem likely to me that (1) and (3) are Marty Feldstein's and Andrew Samwick's reasons for being strong advocates of privatization, and that (4) is Kent Smetters's reason for being a strong advocate of privatization. But their reasons aren't the administration's reasons, and hence whatever plan a second Bush administration might ultimately propose would be unlikely to be crafted to achieve goals (1), (3), or (4).

Daniel Davies responds:
Christ on a bike! If you don't mind my saying so, Brad, these reasons range from "weak" to "mad".

1. The stock market is not a material source of funds for investment. There is no reason to suppose that it would become one simply if one threw a load of money at the stock market.

2. Aside from the fact that this is social engineering far more radical than the French working hours legislation, savings are fungible. It could easily go the other way; that households do not currently count SS as part of their savings and would reduce other savings if they began to do so.

3. This is insanity of a level which requires a very great degree of intelligence to achieve. In primitive societies in the Kalahari, they are aware that the duty of the young to support the old is a moral duty. This moral duty even made it into the Ten Commandments. It takes years of education to get someone to the point where they believe that it is "immoral" to believe that the old have a claim on the young for no better reason than that they gave birth to them and raised them.

4. In general, projections of catastrophe which have as one of their premises that people will do obviously crazy things, are built on sand.

5. The Labour government's first action on coming to power in 1997 was to pass a law which effectively represented a 10% windfall tax on private pension funds (they removed the tax credit on dividends). The courts didn't make a squeak.

I've never understood how anyone can end up believing that small risk pools are better than big ones, or that equities make a better matching asset for certain future liabilities than bonds. I note idly that in the USA it would be illegal to run a life annuity company on the basis suggested for Social Security; in the UK it is legal, and ask any Equitable Life policyholder how well that turned out.
The Top 10 Myths About Social Security Reform
The Heritage Foundation.
The Third Bush-Kerry Presidential Debate
SCHIEFFER: Mr. President, the next question is to you. We all know that Social Security is running out of money, and it has to be fixed. You have proposed to fix it by letting people put some of the money collected to pay benefits into private savings accounts. But the critics are saying that's going to mean finding $1 trillion over the next 10 years to continue paying benefits as those accounts are being set up.

So where do you get the money? Are you going to have to increase the deficit by that much over 10 years?

BUSH: First, let me make sure that every senior listening today understands that when we're talking about reforming Social Security, that they'll still get their checks.

I remember the 2000 campaign, people said if George W. gets elected, your check will be taken away. Well, people got their checks, and they'll continue to get their checks.

There is a problem for our youngsters, a real problem. And if we don't act today, the problem will be valued in the trillions. And so I think we need to think differently. We'll honor our commitment to our seniors. But for our children and our grandchildren, we need to have a different strategy.

And recognizing that, I called together a group of our fellow citizens to study the issue. It was a committee chaired by the late Senator Daniel Patrick Moynihan of New York, a Democrat. And they came up with a variety of ideas for people to look at.

I believe that younger workers ought to be allowed to take some of their own money and put it in a personal savings account, because I understand that they need to get better rates of return than the rates of return being given in the current Social Security trust.

And the compounding rate of interest effect will make it more likely that the Social Security system is solvent for our children and our grandchildren. I will work with Republicans and Democrats. It'll be a vital issue in my second term. It is an issue that I am willing to take on, and so I'll bring Republicans and Democrats together.

And we're of course going to have to consider the costs. But I want to warn my fellow citizens: The cost of doing nothing, the cost of saying the current system is OK, far exceeds the costs of trying to make sure we save the system for our children.

SCHIEFFER: Senator Kerry?

KERRY: You just heard the president say that young people ought to be able to take money out of Social Security and put it in their own accounts.

Now, my fellow Americans, that's an invitation to disaster.

The CBO said very clearly that if you were to adopt the president's plan, there would be a $2 trillion hole in Social Security, because today's workers pay in to the system for today's retirees. And the CBO said -- that's the Congressional Budget Office; it's bipartisan -- they said that there would have to be a cut in benefits of 25 percent to 40 percent.

Now, the president has never explained to America, ever, hasn't done it tonight, where does the transitional money, that $2 trillion, come from?

He's already got $3 trillion, according to The Washington Post, of expenses that he's put on the line from his convention and the promises of this campaign, none of which are paid for. Not one of them are paid for.

The fact is that the president is driving the largest deficits in American history. He's broken the pay-as-you-go rules.

I have a record of fighting for fiscal responsibility. In 1985, I was one of the first Democrats -- broke with my party. We balanced the budget in the '90s. We paid down the debt for two years.

And that's what we're going to do. We're going to protect Social Security. I will not privatize it. I will not cut the benefits. And we're going to be fiscally responsible. And we will take care of Social Security.

SCHIEFFER: Let me just stay on Social Security with a new question for Senator Kerry, because, Senator Kerry, you have just said you will not cut benefits.

Alan Greenspan, the chairman of the Federal Reserve, says there's no way that Social Security can pay retirees what we have promised them unless we recalibrate.

What he's suggesting, we're going to cut benefits or we're going to have to raise the retirement age. We may have to take some other reform. But if you've just said, you've promised no changes, does that mean you're just going to leave this as a problem, another problem for our children to solve?

KERRY: Not at all. Absolutely not, Bob. This is the same thing we heard -- remember, I appeared on "Meet the Press" with Tim Russert in 1990-something. We heard the same thing. We fixed it.

In fact, we put together a $5. 6 trillion surplus in the '90s that was for the purpose of saving Social Security. If you take the tax cut that the president of the United States has given -- President Bush gave to Americans in the top 1 percent of America -- just that tax cut that went to the top 1 percent of America would have saved Social Security until the year 2075.

The president decided to give it to the wealthiest Americans in a tax cut. Now, Alan Greenspan, who I think has done a terrific job in monetary policy, supports the president's tax cut. I don't. I support it for the middle class, not that part of it that goes to people earning more than $200,000 a year.

And when I roll it back and we invest in the things that I have talked about to move our economy, we're going to grow sufficiently, it would begin to cut the deficit in half, and we get back to where we were at the end of the 1990s when we balanced the budget and paid down the debt of this country.

Now, we can do that.

Now, if later on after a period of time we find that Social Security is in trouble, we'll pull together the top experts of the country. We'll do exactly what we did in the 1990s. And we'll make whatever adjustment is necessary.

But the first and most important thing is to start creating jobs in America. The jobs the president is creating pay $9,000 less than the jobs that we're losing. And this is the first president in 72 years to preside over an economy in America that has lost jobs, 1. 6 million jobs.

Eleven other presidents -- six Democrats and five Republicans -- had wars, had recessions, had great difficulties; none of them lost jobs the way this president has.

I have a plan to put America back to work. And if we're fiscally responsible and put America back to work, we're going to fix Social Security.

SCHIEFFER: Mr. President?

BUSH: He forgot to tell you he voted to tax Social Security benefits more than one time. I didn't hear any plan to fix Social Security. I heard more of the same.

He talks about middle-class tax cuts. That's exactly where the tax cuts went. Most of the tax cuts went to low- and middle-income Americans. And now the tax code is more fair. Twenty percent of the upper-income people pay about 80 percent of the taxes in America today because of how we structured the tax cuts. People listening out there know the benefits of the tax cuts we passed. If you have a child, you got tax relief. If you're married, you got tax relief. If you pay any tax at all, you got tax relief. All of which was opposed by my opponent.

And the tax relief was important to spur consumption and investment to get us out of this recession.

People need to remember: Six months prior to my arrival, the stock market started to go down. And it was one of the largest declines in our history. And then we had a recession and we got attacked, which cost us 1 million jobs.

But we acted. I led the Congress. We passed tax relief. And now this economy is growing. We added 1. 9 million new jobs over the last 13 months.

Sure, there's more work to do. But the way to make sure our economy grows is not to raise taxes on small-business owners. It's not to increase the scope of the federal government. It's to make sure we have fiscal sanity and keep taxes low.
Privatize Social Security? No
Henry Aaron of Brookings.
The Simple Arithmetic of Social Security Privatization
Brad DeLong on a workable PRIVATIZATION.
Social Security: What's Next?
Wall Street Journal ECONOBLOG debate between Tyler Cowen and John Irons.
Kevin Drum pursues the conversation...
Basic Facts on Social Security and Proposed Benefit Cuts/Privatization[PDF]
Dean Baker and David Rosnick.[Center for Economic and Policy Research]
Social Security Reform
A primer from the blog The Lowest Deep.
What is the Low Cost alternative? What does it mean?
The Bruce Web on the Trustees' handling of the low projections.
Is the Social Security Trust Fund Worth Anything?
The economics blog Angry Bear links to a paper by Kent Smetters in the context of Smetter's previous calculation of a $44 trillion present value debt in perpetuity as previously discussed by Bruce Bartlett.
Yet More on Social Security
The Social Security problem does have two parts: (i) How are Social Security's own internal accounts to be balanced? And (ii) how do we make sure that Social Security's investments are sound--that those with whom Social Security invests its balances don't lose them so that the kitty is bare when it is time to pay beneficiaries?

When Kent Smetters worries that the Social Security Trust Fund's balances are not safe because, as Angry Bear puts it, the assumption that "policymakers set spending and tax rates for the other levels of government so as to insure that the General Fund adheres to a long-run balanced budget constraint" is unwarranted, that's what he's talking about: an implicit or explicit default by the Treasury on that tranche of its bonds that are owned by the Social Security Trust Fund: the U.S. Treasury behaving like the Confederate Treasury. And I think that in Kent's mind the principal virtue of private accounts is to change the perceptions of Tom Delay, Bill Frist, and other congressional leaders in a way that makes such a default much less likely. The mechanism by which private accounts accomplish this is, however, unclear to me. The normal mechanism would be that transferring money to private accounts raises the reported budget deficit, which alarms deficit hawks and leads to tax increases and spending cuts. But Kent is now on record as saying that shifting money to private accounts shouldn't be counted as an increase in the budget deficit. There seems to be an inconsistency here...
Social Security Privatization as the Mother of All Con-Man Smoke-and-Mirrors Shell-Games
Nouriel Roubini.

Social Security Meta-Archive: December 2004


Sir GreenSPan Con-UN-Drum said...

There can be only ONE valid long-term answer to Chairman Alan Greenspan Conundrum: The Activating Message for X-it & Security.
Chairman Alan Greenspan is the official political hack of The Partners of the X-it in Washington.

Russ Hicks said...

Wow, that's scary.

Is the Bat Signal out of commission?
Did Cousin It join the X-Men?

Is this a job for Buffy or Angel?