DEAN RESPONDS TO SAMWICK
Dean Baker's test:
1) I have a test of my own that I have been trying to get economists to take (thus far unsuccessfully), in which I ask proponents of privatization to write down the set of dividend yields and capital gains that will give them the 6.5-7.0 percent real stock returns that they conventionally assume. Such returns were possible in the past because the price to earnings (PE) ratios have historically been much lower and profit growth was much faster.12/7
The price to earnings ratio averaged about 14.5 to 1 over the last seventy years, compared to more than 20 to 1 today. This is important, because if 60 percent of profits are paid out as dividends (or used for share buybacks), this gets you a dividend yield of over 4.0 percent with a PE ratio of 14.5 to one. It gets you just 3.0 percent with a PE ratio of 20 to 1, and of course less when the PE ratio is higher.
Dean Baker Gives Us All a Social Security Test
Brad Delong takes Dean Baker's test:
Let's see... Assume a payout ratio of 60%. Earnings yield of 5% per year... That gives you a dividend yield of 3% per year... That means that the profits of currently existing and traded companies (not aggregate profits!) have to grow at 3.5%-4% per year... That means that the economy as a whole has to grow at 4.5%-5% per year forever... That's much higher than the Social Security actuaries' long-run growth assumption, which heads for productivity growth of about 1% per year and very low population growth by 2050...Inventing a Crisis
In other words, the stock market can attain its 6-7% per year real payoff only if the macroeconomic news in the future is much better than Social Security is projecting, in which case there's no Social Security financing problem at all. What grade do I get?
Krugman on privatization's effect on Social Security financing.
The General Fund Crisis II
Paul Krugman points out that right now General Fund revenues cover only 68% of non-Social Security federal expenditures, and that a generation from now--when the Social Security Trust Fund balance is projected to reach zero--Social Security revenues will still cover 81% of Social Security expenditures.12/8
We have much worse fiscal problems elsewhere than we have with Social Security.
Is the Social Security Trust Fund worth less than zero?
Jim Glass follows up the Angry Bear's discussion of Kent Smetters'2003 Trust Fund paper [PDF] which suggests that the Trust Fund has had a net negative impact on the budget.
But much of the negative impact seems to stem from LBJ's bringing Social Security into the budget combined with the move from pay-as-you-go to "partial-funding" of the Trust Fund in 1983 giving the subsequent false impression of a better General Fund stance than the reality.
The paper says the Trust Fund has been a bad deal from the late 1940s on but doesn't seem to clearly isolate the intrinsic effect of the Trust Fund itself as opposed to its shell function in fiscal shell games.
Dean Baker writes in The Nation.
Social Security: Bush's quiet war
Christian Science Monitor coverage.
Borrow, Speculate and Hope
Krugman: Borrowing to privatize.
Real Reform for Social Security
New York Times Op-ed columnist David Brooks.
Taking a Hard Line On Social Security
The blog MyDD plots pro-Social Security strategy.
Brad DeLong Is Driven Into Shrill Unholy Madness:
The chart below shows the Gale-Orszag baseline for the federal government: current policies, with a fix of the AMT so that it does not replace the general tax system, and with the extension of those tax provisions currently scheduled to expire:12/13
The U.S. government's fiscal problems are not in the Social Security system. The U.S. government's fiscal problems are in the General Fund. And these fiscal problems are dire indeed.
SOCIAL SECURITY DOOM MONGERING
Kevin Drum on the receding of Social Security's "doom":
WOULD BORROWING $2 TRILLION FOR INDIVIDUAL ACCOUNTS
ELIMINATE $10 TRILLION IN SOCIAL SECURITY LIABILITIES?
Jason Furman, William G. Gale, and Peter R. Orszag at the Center on Budget and Policy Priorities.
Twelve Reasons Why Privatizing Social Security is a Bad Idea
Greg Anrig, Jr., and Bernard Wasow of The Century Foundation.
THE NEW PROPOSAL TO OMIT SEVERAL TRILLION DOLLARS
IN COSTS FOR SOCIAL SECURITY PRIVATE ACCOUNTS
FROM THE FEDERAL BUDGET
TUESDAY, DECEMBER 14, 2004 AT 11:00 AM (ET)[PDF]
Center on Budget and Policy Priorities.
For a lockbox
As Kevin Drum pointed out, the Trust Fund could sell its bonds on the open market and by other assets; at that point, no one would doubt that the bond obligations were real, or that the assets were real assets of the Trust Fund.12/15
But the problem would remain that the trustees are mere servants of the current administration, with no authority to sue if the President and the Congress refused to spend the Trust Fund assets to pay Social Security benefits. So here's Plan B:
Make the Social Security System a separate legal entity, as the Federal Reserve System is, with its own governing body and the right to sue. The trustees would be appointed by the President, of course, but they would have a fiduciary obligation to Social Security beneficiaries and the right to sue the Federal government if it tried to confiscate retirement assets to spend them for other purposes.
I'm not sure this is necessary, but it's certainly possible. And since it's possible, the argument that we can't ensure that the Social Security Trust Fund will be spent to fund the pension system is simply false. We can. We should.
Talking Points Memo
Joshua Micah Marshall's take on the Bush privatization drive and strategy for a Democratic response.
Michael Kinsley on Why Privatization Can't Work
Dallas Mavericks owner Mark Cuban cites economist Hal Varian's discussion of corporations moving from defined benefits to 401ks and the failure of the government to protect soldiers from being scammed by brokers as reasons not to privatize SS and hands over the proverbial microphone of his blog to Michael Kinsley:
1. To "work," privatization must generate more money for retirees than current arrangements. This bonus is supposed to be extra money in retirees' pockets and/or it is supposed to make up for a reduction in promised benefits, thus helping to close the looming revenue gap.12/16
2. Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people.
3. Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.a) If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same.
b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.
4. If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.
a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.
b) In other words, privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false.
c) Even if the theory is true, initially, privatization will make it false. The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money.
d) In short, there is no way other investors can be tricked or induced into financing a higher return on Social Security.
5. If the privatization bonus cannot come from the existing economy, and cannot come from growth, it cannot exist. And therefore, privatization cannot work.
Could Social Security Privatization Succeed?
Brad DeLong responds to Kinsley:
Marty Feldstein and company might say that Kinsley's (4c) is false: the inflow of money will bid up the price and lower the return on stocks a bit, but not enough to make long-run stock market investments by private account holders a bad deal. And he would say that taking some of the high returns earned by today's stockholding rich and transferring them to Social Security beneficiaries is the point of the exercise.Imitation is the Sincerest Form of Flattery...the FT on Social Security...
Kent Smetters and company might say that Kinsley's (3a) is wrong: that once the privatized parts of Social Security are off the books, the Republican High Politicians will have no option but to propose serious spending cuts or tax increases in order to bring the Federal Government's General Fund into long-term balance. These changes in fiscal policy triggered by the fact that the government is no longer allowed to use the Social Security surplus to pretend that it has a plan for funding general spending will raise national saving, and boost economic growth.
Andrew Samwick and company might say that we dare not raise Social Security taxes without establishing private accounts because we do not dare have the Federal Government voting for CEOs and Directors. This line of thought is that Kinsley is not wrong but incomplete: private accounts then make the policy of raising Social Security contributions a good one.
Ned Gramlich and company might say that raising Social Security contributions becomes politically possible once you have private accounts--that it is the fear that people won't see any return for their contributions that blocks raising more resources for the system. This line of thought is that Kinsley is not wrong so much as incomplete: it's not a privatization bonus, it's the tax increases that privatization will make possible.
All these arguments have, I think, some force. None of them--not even all of them taken together--make a case for whatever monstrosity is about to emerge from the Bush administration.
Economist Nouriel Roubini on the FT editorial.
President Discusses Budget, Tax Relief at White House Conference
White House transcript: Bush discusses Social Security with former Colorado congressman Tim Penny and others.
Groups Line Up to Oppose Bush Social Security Plan
Economic Summit Takes Up Social Security Reform
Link to NPR coverage.
On Point: Retire At Your Own Risk
Link to radio broadcast including John Shoven and Paul Krugman.
SOCIAL SECURITY AND ME....
Kevin Drum of The Washington Monthly summarizes the evolution of his views on Social Security.
Social Security: Red Ink's Benefits
Michael Mandel of Business Week slams Democrats for being against borrowing to finance Social Security - but doesn't weigh in on Bush's tax cuts
Buying Into Failure
Krugman. New York Times abstract:
“Paul Krugman Op-Ed column says Chile's and Britain's experiences with privatized retirement plans show folly of Pres Bush's plan for privatizing Social Security; says privatization dissipates large fraction of workers' contributions on fees to investment companies and leaves many retirees in poverty.”More on Privatization
Arnold Kling mentions Krugman’s column.
Paul Krugman: Lies, Evasions or Simple Ignorance?
Tim Worstall decries Krugman’s description of UK pension reform.
Basic reading on Social Security privatisation
A nicely concise summary from the blog Technopolis.
Good-Will Is Low for Social Security Talks
New York Times coverage.
Cause for Concern
Democratic activist David Sirita speculates on the role to be played in the Social Security debate by the DLC.
Matthew Yglesias asks:
The first thing that would be nice to calculate if someone can figure out how to do it is the exact average productivity growth over the next 75 years that we need to make sure that the Trust Fund is never exhausted. We know that under the "low cost" projection, the fund stays solvent forever, but the low cost scenario is actually lower in cost than needed. Where's the tipping point? I can't begin to understand how one would do the requisite math.Ask Dr. Social Security Projections
The other set of questions I have in mind right now pertain to the point I made here about how they estimate producitivity growth. This is done by breaking up the past into a series of economic cycles measured peak-to-peak (with the most recent peak in 2000) calculating the average annual producivity growth for each cycle, and then averaging together the results for the last four cycles. That's obviously a pretty arbitrary method. I'd be interested in knowing what you get if you try some different methods. What happens if you use the last four business cycles measured trough to trough? Or what if you use the last five (or six or...) business cycles? What happens if, instead of using the double-averaging method, you just take average annual productivity 1966-2000? How sensitive, in other words, are the long-term projections of doom to minor changes in how the analysis is done? Has the SSA just happened to pick the most pessimistic possible way to do this? That'd be quite the coincidence.
Brad DeLong answers:
The current low-cost estimate has the 75-year balance at +0.41% of taxable payroll; the intermediate estimate is at -1.89% of taxable payroll; the high-cost estimate is at -4.96% of taxable payroll. The long-run economy-wide productivity growth rates for those three projections are 1.9%, 1.6%, and 1.3% per year, respectively. The crossover point--the 75-year balance of zero--currently comes at a productivity growth rate of 1.85% per year. The average productivity growth rate over the 40 years from 1960-2000 was 1.76% per year. Add in 2001-2004 (unless the fourth quarter of 2004 is really bizarre) and find that the average productivity growth rate over 1960-2004 is 1.85% per year. Up until the late 1990s there was a reason to project future productivity growth to be slower than the long-run past average: productivity growth did seem to be gradually slowing down. Since the late 1990s that is no longer the case: there is no longer any good reason to project that future productivity growth will be slower than in the past (unless you believe that we are going to fail to undo the Bush policy mistakes, that is). You shouldn't try to compute averages by calculating trough-to-trough numbers. Different business cycle troughs are very different in their characteristics. By contrast, while all peaks are not identical, they are closer along a number of dimensions like capacity utilization and upward pressure on inflation than are troughs. The 44 years since 1960 give you an average growth rate of 1.86% per year; the 39 years since 1965 give you 1.69% per year; the 34 years since 1970 give you 1.66% per year. Moving forward: since 1975, 1.58%; since 1980, 1.70%; since 1985, 1.73%; since 1990, 1.91%; since 1995, 2.37%. Personally, if I had to give an estimate of what productivity growth will be over the next 75 years, I'd guess 1.9% per year because it seems to me that 1960-2004 includes a uniquely bad period in 1973-1989 or so. I'd be really surprised if the productivity growth rate averaged less than 1.6% per year. And I'd be really surprised if it averaged more than 2.3% per year. But that probability distribution is worth exactly what you paid for it.
Crisis? What Social Security Crisis?
DeLong on on the positive impact on the end of the 1973-95 productivity slowdown on Social Security finance.
Long-Term Analysis of the Diamond-Orzsag Social Security Plan
The Bottom Line on Overhauling Social Security
To determine how sensitive retirement income is to the rate of investment return, Mr. Dudley worked out some calculations under Reform Model 2. The results are stunning.The Economic Policy Institute on Social Security
If a worker earns just the respectable expected bond rate of 3 percent a year, or 2.7 percent after transactions costs, then the typical one-earner family will retire on only about 58 percent of the projected benefits under current law. If the investor earns zero over time, which may well occur for some investors, the projected retirement benefit is only a little more than 38 percent of the current benefit. These are considerably worse than the projected adjustments needed to bring the present system into balance.
And there are other costs to privatization. Consider the potential impact from borrowing as much as $2 trillion, which many experts see as the projected transition costs to cover the gap that would arise in payments to current retirees and those retiring soon once workers started diverting into private accounts some of the payroll taxes used to pay benefits. Financial markets may not absorb that debt without interest rates rising and the dollar falling.
The Andrew Samwick Fraction Grows with the Defection of the Renegade Froomkin
DeLong vs. Samwick & Froomkin on government vs. private investment in equities.
If It's Right, It's Wrong
Michael Kinsley responds to DeLong and others:
Whatever its flaws, is privatization inferior to the current system, with its looming inability to keep its promises? One problem with this question is that privatization itself doesn't address this looming gap. Privatization plans call for borrowing a "transitional" gazillion dollars to close the gap. With a transition like that, any plan will work, including no plan at all.Social Security Yet Again: A Clarification
Berkeley economist Brad DeLong and blogger Mickey Kaus, among others, challenged my argument that nothing about privatization promises to increase private investment. They cited the well-known research by economist Martin Feldstein showing that Social Security reduces personal savings. Big surprise: If you know you've got a bit of a nest egg coming from the government, you may not be as avid a saver. It follows that less Social Security should increase personal savings.
But privatization is not supposed to produce a net loss in anyone's retirement nest egg. In fact, if it worked as promised, it would enlarge the nest egg. By the Feldstein thesis, that would reduce private saving. So, once again: Privatization relies on a theory that is wrong if it's right, and right only if it's wrong.
Stephen Moore, known as "the Club for Growth" (actually, that's the name of his organization, but it fits him pretty well) is an omnipresent Washington operative and talking head, and probably the leading non-administration voice in favor of privatization. His e-mail, direct from Bush's economic conference last week, made only two fresh points.
One was that the Social Security money that people keep and invest for themselves amounts to "a big supply side tax cut." If Moore envisions reducing what people owe the government in taxes without reducing what the government owes people in benefits, if he therefore plans to solve the problem of a huge deficit by making it bigger and if he fantasizes that cutting Social Security taxes will increase Social Security revenue, we are indeed back in the dream world of supply side tax cuts, with predictable results. But if he contemplates reducing Social Security payments proportionally to the reduction in taxes -- and counting on people to make up the difference with their new investments -- people will be, and will feel, no richer than they were before and there will be no supply-side incentives.
I was actually thinking of a different line of argument that Marty makes. These days he is more likely to stress not the reduction in personal savings that may be generated by expectations of the continuation of the pay-as-you-go Social Security system, but the gap between stock and bond returns. Marty's argument these days is much more likely to be the claim (with which I have a lot of sympathy) that the stock market does a lousy job of mobilizing society's risk-bearing resources. Stocks appear to be priced as though the marginal investor is a rich 62-year old with some clogged arteries and a fifteen-year life expectancy who is not expecting to leave a fortune to his descendants. But if the stock market were working well, the marginal investor would be a 40-year old in his or her peak earning years looking out to retirement spending 40 years in the future--an investor much less averse to risk than the 62-year old.12/27
Turning Social Security into a forced-equity-savings program would, Marty believes, not only produce huge profits for the system but also materially improve the efficiency of U.S. financial markets.
Social Insecurity: the annuity problem
Mark Kleiman on supplanting Social Security with Social Risk.
Diamond and Orszag's Social Security Plan
Commentary from the blog The Dead Parrot Society
What Social Security Reform Should Democrats Propose?
Andrew Samwick notes the failure of Democratic politicians to rally behind Diamond-Orszag.
Social Security Part I: Insurance and Risk Premiums
Angry Bear on the insurance role of Social Security.
Social Security Meta-Archive: January 2005
Social Security Meta-Archive: 2005