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Hm...

...Max Sawicky set out to shut down loose talk of privatizing Social Security, and I must say that I find this rather convincing, especially that first chart. Obviously in the real world you'd never implement a policy that had that weird spiking effect (around 2040 or 2050 according to which set of estimates you use) but you could smooth that out with some combination of modest tax increases and modest cuts in the rate of benefit growth, neither of which I would find especially objectionable.

November 29, 2004 | Permalink

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Literally and completely, Republicans are stealing the food and medicine from little old ladies to pay off their Wall Street campaign contributors.

This is what that Party is all about.

Posted by: bob mcmanus | Nov 29, 2004 2:07:15 PM

The shocking transfer of wealth from the middle and lower class to corporations will continue almost without interest of the SCLM.

Posted by: hawkseye | Nov 29, 2004 2:20:49 PM

Republicans are stealing the food and medicine from little old ladies

Ezekiel 16:49 :

"Now this was the sin of your sister Sodom: She and her daughters were arrogant, overfed and unconcerned; they did not help the poor and needy."

but that's the part of "Sodimite" fundies don't like to talk about. it's not as much fun as the other part.

Posted by: cleek | Nov 29, 2004 2:56:00 PM

I'd like to see that graph reworked if you took $1 trillion (or whatever amount Bush has proposed borrowing "off the books") and put it towards maintaining the benefit curve. I suspect you'd mostly solve the "crisis".

Posted by: SP | Nov 29, 2004 3:03:59 PM

Bush and his minions look only for ways to transfer more money to the pockets of the very wealthy. The revisions to the Social Security program are aimed to do nothing more than that. Just imagine the boost in stock prices, at least temporarily, after several billion dollars of new stock purchases are generated by those SS replacement accounts. And, those now holding large blocks of stock will be the primary winners.

Posted by: Vaughn Hopkins | Nov 29, 2004 3:13:30 PM

And you guys wonder why Democrats lose elections.

Posted by: Chad | Nov 29, 2004 3:18:01 PM

"but you could smooth that out with some combination of modest tax increases and modest cuts in the rate of benefit growth, neither of which I would find especially objectionable."

If a "combination" is needed, good luck finding a Republican President who will do that. If one believes that raising taxes is akin to sin, its no surprise that same person will believe that SS is doomed.

Taxes are evil. 'Nuff said.

Posted by: Adrock | Nov 29, 2004 4:05:50 PM

http://www.socialsecurity.org/pubs/articles/tanner-040429.html

Posted by: Jason Ligon | Nov 29, 2004 4:16:17 PM

Jason L., I heard much the same sort of dire predictions about Social Security back in 1983, and it was overblown back then. Remember, when talking about trillions of dollars that we're also talking about a period of four decades here, so keep those numbers in perspective.

Posted by: David W. | Nov 29, 2004 4:22:25 PM

Jason L., I heard much the same sort of dire predictions about Social Security back in 1983, and it was overblown back then

It's always helpful to follow the money when a major policy sea-change is proposed despite the lack of evidence of a problem.

Who stands to gain from a privatization scheme? Certainly not the public.

What always gets me is those who predict SS is doomed--using rates of low growth unseen in this country for over a century.

Posted by: Jadegold | Nov 29, 2004 6:10:41 PM

His analysis in section 3 is totally bogus. He doesn't know what he's talking about here at all. 7% is fairly conservative over the long haul, and does NOT mean a rise in P/E's to some ridiculous level. The reason is that earnings are growing at the same time. That's why P/E's have maintain a relatively narrow range over time, not jumping by 5x or something, for the market as a whole.

Posted by: K | Nov 29, 2004 7:59:03 PM

K,

I guarantee you that Dean Baker, co-author of that piece, has forgotten more about this subject than you'll ever know.

He's right about this, and you're wrong. The reason should be simple to understand:

Over the long run, earnings cannot grow significantly faster than the economy as a whole. That's because if they did, the entire GDP would soon consist of profits.

Thus, essentially the only way for the stock market to increase in value at a faster rate than the underlying economy is for the P/E ratio to rise.

I encourage you to try to produce your own numbers -- consistent with the SSA's projections for the next 75 years -- contradicting this. If it can be done, it shouldn't take you longer than ten minutes or so.

You won't be able to, of course. As you'll see if you go here, even Martin Feldstein, a professor at Harvard, supporter of Social Security privatization and one of America's most prominent conservative economists, couldn't do it.

But good luck. Let me know how it goes.

Posted by: A Tiny | Nov 29, 2004 8:25:24 PM

A. Tiny: The US economy grew at 2-3% over the last 75 years, while stocks averaged a real return of about 7%. Am I missing something, or did what you say is impossible happen over the course of the last 75 years?

Posted by: Tim | Nov 29, 2004 9:26:41 PM

His tax increases analysis in #6 is the analysis of a man that wants to raise taxes. I'm giving 15% and I really don't care what the percentage increase will be to get it to 20%. I just care that I don't want to be paying 20%. If you're willing to raise income taxes to pay back the trust fund debt and raise payroll taxes to handle the future problem, then no, we don't have a problem.

But that's the problem with you guys, you've got your heads so far up your asses, you don't realize that a majority of Americans have dug their heels in on marriage, taxes, and winning in Iraq.

Liberalism has won, but it's not going to continue to be able to run the score up.

Posted by: Chad | Nov 29, 2004 11:18:17 PM

Tim,

I'm sorry, I wasn't clear enough. I left some things out to avoid lots of confusing qualifications.

Yes, it was possible for stocks to generate high returns over the past 75 years (although closer to 6% rather than the 7% you cite) while the economy grew at 2-3%. The point is that, starting where we are now, it's impossible for stocks to generate 6-7% returns over the next 75 years if economic conditions are as projected by the Social Security Administration. (The SSA numbers are the basis for all discussions of this subject.)

Some important differences between now and 75 years ago are:

1. The SSA projects the US economy will grow at an average annual rate of 1.75%.
2. P/E ratios are already near historic highs.
3. Publicly-traded corporations account for a greater percentage of GDP.

Beyond this, you did miss that I said earnings (rather than returns) cannot grow significantly faster than the underlying economy. The return on stocks is the dividend plus capital gains, not just earnings. (As you can see here, Dean Baker, co-author of this paper, projects a return on stocks around 3.5% using the SSA's projections of 1.75% GDP growth.) However, my next sentence was unclear and arguably incorrect, for which I apologize.

Anyway, the point remains. Go ahead and try to come up with projections showing a 7% (or 6%) annual return on stocks. If you have a basic grounding in economics, and it's possible, it shouldn't take you much time at all.

But you won't be able to do it, just as Martin Feldstein couldn't. I also know that four years ago the chief actuary of Social Security was concerned Congress would ask him to try, because he knew it was impossible.

Of course, I realize none of this matters to those who want to privatize Social Security. That's because their agenda is based on ideological desire, rather than mathematical reality.

Posted by: A Tiny | Nov 30, 2004 12:30:41 AM

Tim,

I see you work at the Cato Institute, so I probably went into more detail than necessary.

Anyway, you might be interested to know that Dean Baker has repeatedly asked Cato proponents of Social Security privatization to come up with the types of projections I mention here.

As I say, it shouldn't take much time at all to do this... if it's possible. Yet no one from Cato ever has. I suggest you ask them why not.

Posted by: A Tiny | Nov 30, 2004 12:43:27 AM

Chad,

I appreciate your honesty. There is no Social Security "crisis," but there may be people who are unwilling to to pay the higher taxes which might be necessary to fix it. I'm certain such people would be in a minority, but it's far better to debate the issue on these terms rather than talking about it as though it's some sort of huge problem that has to be dealt with right now.

Of course, you're missing something pretty basic. The problem (if it fact there turns out to be one at all) is that in the future it will take a larger percentage of GDP than it does now to pay promised benefits to retirees. This is mostly due to the fact that people are living longer.

There is no painless way to solve this situation. Either taxes will be raised, or benefits will be reduced, or -- if private accounts are introduced -- the income of some members of society will be reduced. (Their income will be reduced because some people with private accounts will own higher paying investments that otherwise would belong to other people.)

So you can say "I don't want to pay higher taxes." Just be aware that when you do, you are also saying, "I also want lower benefits and a lower income."

Posted by: A Tiny | Nov 30, 2004 1:00:28 AM

There is no Social Security "crisis," but there may be people who are unwilling to to pay the higher taxes which might be necessary to fix it.

It's not just that some people are unwilling to pay the higher taxes. It's that people who pay mostly the income tax (the rich) are refusing to pay back the money they've been borrowing from people who pay mostly the SS tax (the working poor) for a couple of decades now. It's a theft, simple as that.

Posted by: abb1 | Nov 30, 2004 4:49:55 AM

abb1, as a boomer who graduated from college back in 1982, I completely agree. We've *been* paying in more than our share to Social Security, while other federal taxes have been cut. It's not fair to somehow discount those Trust Fund bonds as not being real money, as it's real money I've been paying in for over twenty years now.

Posted by: David W. | Nov 30, 2004 8:55:33 AM

Well, you boys need to go talk to your Congressman from 1983, because he's to blame. The 1983 Congress choose to finance the government with a certain mix of taxes. The Congress this year will have that same choice. The Congress 10 years from now will have that same choice. If the Congress doesn't want to pay those trust fund bonds back all they have to do is cut benefits or raise taxes to balance the money coming in with the money going out. The Congress in 1983 does not get to make choices for future Congresses.

We have only been in surplus since around 1985 and only substantially since 1995. Those revenues were spent on you whether you agreed with the expenditures or not.

It's dumb to run surpluses or deficits in a pay-as-you-go system, but that doesn't change the fact that's what happened.

I'm already paying higher taxes. As Max has indicated I'm getting screwed because I'm right near the cap and the benefits are adjusted to give more to people who are earning less. SS isn't a good deal for me.

Posted by: Chad | Nov 30, 2004 9:08:29 AM

"If the Congress doesn't want to pay those trust fund bonds back ..."

Congress doesn't have any choice about paying those bonds back, unless you think theft is an option.

Posted by: David W. | Nov 30, 2004 10:25:37 AM

"Jason L., I heard much the same sort of dire predictions about Social Security back in 1983, and it was overblown back then. Remember, when talking about trillions of dollars that we're also talking about a period of four decades here, so keep those numbers in perspective."

Yes, forty years of an ever decreasing payor to beneficiary ratio. As a 30-something, I will be the one paying for the shortfall. I will also be the one paying for free drugs that the boomers are voting themselves. The longer we wait, the worse the impact on those who wind up paying the bills.

How can the same people who complain about the national debt exclusive of social security be so blase about an unfunded shortfall of over 10 trillion dollars?

Mind you, I don't believe that the rates of return in private accounts will solve the problem by themselves, but they will do two things:

1) Increase the savings rate, thereby decreasing the moral hazard of living a life knowing that you will be bailed out by a government program.

2) Place retirement savings in trust, separate from general revenue. Nothing irritates me more than the quarterly social security 'statement' I get. What I will really get is whatever congress decides to give me, and demographics don't work out in my favor.

To mend the insolvency, we should raise the retirement age for starters, and then index it to increasing life expectancy as time goes on. Eventually, when forced savings is a well established practice, we means test the hell out of the old social security payments, making them a flat out welfare program for the old and very needy. Benefits would at that point not be tied to previous earnings, but would be designed to keep a recipient's head barely above the poverty line.

Posted by: Jason Ligon | Nov 30, 2004 10:33:20 AM

"Congress doesn't have any choice about paying those bonds back, unless you think theft is an option."

As long as you never allow expenses to exceed revenues, then I don't see why you would have to pay the bonds back. You would just the SS another 30 year bond when the current one expired.

How exactly do you steal from yourself?

Posted by: Chad | Nov 30, 2004 10:36:50 AM

Shorter Chad: all the folks who pay more in payroll taxes than in income taxes were stupid to think that payroll tax revenues earmarked for SS would be spent on SS. Gotcha! Thanks for the income-tax cuts, suckers! On an unrelated note, we may need to be cutting your benefits soon...

Posted by: Silent E | Nov 30, 2004 10:46:32 AM

If the trust fund is a fiction, then there is no reason for separate, dedicated, regressive payroll taxation. If we're going to comingle the funds and pay for SS out of general revenues, then we ought to finance it all out of general revenues: scrap the payroll taxes and raise income taxes - both the employer and employee share.

Businesses would like it too, because it would reduce the "hidden" costs of hiring new workers. Of course, since the progessive income tax generates 41% of federal revenue and the regressive payroll tax generates 42% of federal revenue (source: Center for American Progress), eliminating payroll taxes means we'd have to double income tax rates. But that's a small price to pay for real integrity and honesty about Social Security reform.

Posted by: Silent E | Nov 30, 2004 11:02:47 AM

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