Matthew Yglesias: White House On The Equity Premium

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White House On The Equity Premium

Tim Lee questions the appropriateness of using the CBO's risk-adjustment formula when calculating the impact of the president's private accounts proposal. No doubt the president will do the same when confronted with the awkward facts Tim seeks to debunk. But in that regard, it's worth citing page 421 of Analytical Perspectives for the White House's FY2006 budget:

Economic theory suggests, however, that the difference between the expected return of a risky liquid asset and the Treasury rate is equal to the cost of the asset’s additional risk as priced by the market. Following through on this insight, the best way to project the rate of return on the Fund’s balances is to use a Treasury rate. This will mean that assets with equal economic value as measured by market prices will be treated equivalently, avoiding the appearance that the budget could benefit if the Government bought private sector assets.

This comes in a discussion of managing the National Railroard Retirement Investment Trust and constitutes an endorsement of the CBO approach which, evidently, the administration's economists do believe in when they're not being asked to sell his Social Security plan. And if Tim thinks privatization is a good idea because "piling enormous financial liabilities on our grandchildren" is a bad idea he may be interested in the fact that the Bush plan will, by 2060, increase the debt/GDP ratio by 35 percentage points. Not to 35 percent, mind you. It's already at 30 and the Bush plan would cause it to increase to 65 (well, higher than that thanks to large deficits in the non-Social Security portions of the budget) thus adding an enormous pile of financial liabilities to our grandchildren.

February 12, 2005 | Permalink

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» SUNDAY MORNING
YGLESIAS from MaxSpeak, You Listen!
Atrios is right: these two posts by Matt are great. I had missed this one, which is also good. I especially liked this bit, which Matt found in reading of all things the George Bush Budget's section on the Railroad... [Read More]

Tracked on Feb 13, 2005 11:06:11 AM

» Contradictions everywhere and nowhere from The Dead Parrot Society
When the CBO decided to use a unisex, age-neutral, wealth-weighted risk adjustment to compare how various individuals would fare under a privatized system, I criticized their approach. Individuals looking at the CBO report know their own preferences fo... [Read More]

Tracked on Feb 16, 2005 10:08:34 PM

» Transition Cost Confusion from The Bit Bucket
For the past couple of weeks, Matthew Yglesias has been on a kick about Social Security transition costs. He elaborated on the subjecthere, but ironically, his critique is at least as sloppy as he accuses the privatizers' arguments of being.... [Read More]

Tracked on Feb 24, 2005 6:45:53 PM

Tracked on Feb 24, 2005 6:47:56 PM

Comments

he may be interested in the fact that the Bush plan will, by 2060, increase the debt/GDP ratio by 35 percentage points. Not to 35 percent, mind you. It's already at 30 and the Bush plan would cause it to increase to 65 (well, higher than that thanks to large deficits in the non-Social Security portions of the budget) thus adding an enormous pile of financial liabilities to our grandchildren.

Matthew knows perfectly well that this is completely false, since it ignores the unfunded liability that is currently inherent in Social Security. Which is exactly what Lee is talking about.

If we keep SS as it is without any changes (as is Matthew's preferred policy), his Social Security checks will have to be paid for by his grandchildren (because, as we all know, in a pay-as-you-go system, as SS currently is, younger workers pay directly for the retirees' benefits). On the other hand, in a reformed system, part of retirees' benefits are paid for by yourger workers (either through FICA taxes (at a reduced rate) or through income taxes necessary to pay off the extra general fund debt incurred at "transition cost"). But under a reformed system, part of a retirees' benefits consists of the retirees' own funds.

Matthew is trying to pretend that the only "debt" that counts here is the extra general fund debt incurred at "transition cost". But he knows perfectly well that this isn't true at all - the promised benefits are a liability too. And just because the government doesn't see fit to have an accounting system that acknowledges this doesn't let Matthew off the hook.

This is just another of the continual lies told by the Left in their continuing quest to ensure that Social Security is bankrupted, just so they can oppose George Bush. It really is quite pathetic.

Posted by: Al | Feb 13, 2005 12:07:27 AM

Chin-chin Al. Bottom's up. Let us all bow our heads in solemn shame in fond memory of the Left's . . . shameless, unrelenting, nihilistic and maniacal quest to destroy Social Security! Up is down! Black is white! Boosh is FDR! Behold!

Posted by: fnook | Feb 13, 2005 12:18:58 AM

Yeah, the rightists obsess about the impossibility of honoring trust fund obligations but blithely ignore the astronomical amount of debt accumulating elsewhere.

It's called "straining at a gnat and swallowing a camel."

Posted by: bad Jim | Feb 13, 2005 2:14:39 AM

I don't like lies. And I don't much care which side is pitching them. Besides, I'm an independent voter.

So, let me offer the following opportunity.

Sell me the car.

A few questions, though. After all, someone is trying to encourage me to buy a car.

And I've read Car & Driver, so I know a little bit. AutoWeek improved my knowledge, as well. And I've read the Federal government documentation that has been made available for this model.

Let's see what we can work out.

Basic Questions:

What are the total transition costs to bring private accounts on line? No answer, right? Hmmm...

Well, let's see. CBPP has data (thus far not challenged) which indicates that such costs are at least $4.9 trillion through 2028. Sounds like a lot, doesn't it. BTW, that's $4.9 TRILLION without interest costs...

CBPP also has a graphic which shows what Matt is talking about. It looks like a lot, so to speak. Curve goes up.

So, we don't know the total program conversion costs, even by decade? Yet I'm supposed to support the plan (buy the car)?

Why?

What are the anticipated administrative costs?

Individual account management fees?

What's the Government plan of action should our accounts get hammered in an economic downturn? Oh, my hit, isn't it. Forget. I'm all alone in the downturn.

So, we're talking many trillions of dollars to set up the new Social Security program to save $3.7 trillion over the next 75 years. And save $10 trillion over eternity? And we're going to spend more in the next 40 years in transition costs for the new program than it would cost to "fix" the other program? Why would we do that?

Not to be overlooked is phase 2 (per the White House memo). We're also growing to have to cut benefits or raise taxes no later than 2018 or 2020 for the existing program. So, we'll probably cut benefits (the general expectation).

And we're also going to watch the surpluses monies for the existing Social Security program dry up faster. Instead of 2018, such surpluses will run out in 2012. So, we'll have add that cost to the $4.9 TRILLION (only carrying us through 2018 shortfalls) and add more of the expected existing program shortfalls between 2018 and 2028.

If we know that we will sell more Treasury bonds (borrow more money) to reimburse the Social Security Administration for interest on and redemption of the special issue Treasury bonds provided to the SSA for borrowing its monies to use in the general fund of the Federal Budget, why would we want to add $trillions of additional debt to the government's public debt?

Moreover, what impact will this have on the existing 38 per cent of budget expenditures for interest payments, as a share of the Federal Budget? Will that percentage not increase?

So, you still want me to buy the car, right? Entice me...

By the way, show me that model over there while you're thinking about your answer. Yeah, I want to look at the Social Security Plus model. Wow... It has no transition costs.

Think I'll buy the SSP model. And I'll keep my old car, and have money left over to fix it up and use it as a back and forth car for work. Yeah, I'll have enough left over to handle both vehicles.

No, I don't think you can sell me the multi-trillion dollar model. Both new models accomplish the same investment goal.

Where's the paperwork for the Social Security Plus model? What do you mean it's not for sale? Huh?

I'm not buying the Yugo, pal. Forget it.

Now I will talk to you about this SSP model...

Or I can go to another sales lot.

Posted by: Movie Guy | Feb 13, 2005 2:42:33 AM

Wow, Al, thanks for informing us that in the current system, workers pay and seniors recieve money.

Posted by: scarshapedstar | Feb 13, 2005 4:08:50 AM

This is just another of the continual lies told by the Left in their continuing quest to ensure that Social Security is bankrupted, just so they can oppose George Bush.

This statement doesn't even make sense. I and millions and million like me want our retirements to be far, far poorer so we can oppose Geroge Bush? What are you talking about you dickhead? Democrats are the ones that invented Social Security, the most sucessful anti-poverty program in the history of the United States, with the lowest administrative cost of any government run program.

So all the libruls in the country want to see SS go bankrupt, against our own financial interests amounting to the tens of thousands for many of them, so we can oppose George Bush.

You are without a doubt the stupidest fucking person on the face of the earth that I have ever come across, but that is only because I have never come across Doug Feith.

Now STFU and read a book, for crying out loud.

Posted by: genoasail | Feb 13, 2005 4:18:22 AM

So the "crisis" numbers cite intentionally low growth estimates already exceeded 8 times over and fixing any supposed short-term scare?

How about putting a window on the upper-taxed benefits to the six-figures combined range and extending above that to a higher total than the window for a spaced allotment?

So it truly taxes the extremely rich and those in the combined total/six figure window become a solid upper-middle class.

Posted by: Mr.Murder | Feb 13, 2005 4:37:47 AM

Um, isn't our debt to GDP ratio already 60% or so?

If it's 35%, we'd be in great shape, as most industrialized nations are in the 50-80% range.

But I'm pretty sure of my facts here. Our debt is about $7 trillion, our GDP is about $11 trillion. So that puts our debt to GDP ratio in the 60-69% range.

Posted by: Adam Herman | Feb 13, 2005 4:56:43 AM

This is why you've gotta love Matt. Who the hell else has actually read "page 421 of Analytical Perspectives for the White House's FY2006 budget?"

Posted by: kd | Feb 13, 2005 7:12:48 AM

"This is just another of the continual lies told by the Left in their continuing quest to ensure that Social Security is bankrupted, just so they can oppose George Bush. It really is quite pathetic."

Ah the Leninist Cato approach to the Social Security debate – lie, lie, lie about your true motives and smear your opponents.

BTW, the real psychodrama in all this is the Preznit’s and Karl's need to kill their daddies. IMHO this is the reason so they are so obsessive about killing this key element of FDR's legacy.

Imagine if Karl Rove's father had raised him and he was secure about who was his real father. Imagine a world in which Karl’s mom does not commit suicide in Reno. One or maybe both of these events would have meant that we would have been spared the unleashing of Karl’s inner demons and tormenting us by creating the Mammonite Wing of the Repuglican party. But then again, Karl and "W" have to make the rest of us suffer for the sins of their fathers.

Posted by: ElPocho | Feb 13, 2005 8:00:08 AM

I can only Assume Al is the same troll from Kevin Drum's place. Although he seem much more polite on this site.

Al is obvioulsy an advocate of defaulting on the Treasury Bonds that my payroll taxes have been buying for the past 20+ years.

Sorry. That ain't gonna happen without a fight.

I thought Debt forgiveness was only for Third World countries.

Posted by: def | Feb 13, 2005 8:24:08 AM

Al,

Why do you keep saying that SS is "pay as you go?"

If you include the entire federal budget in what we pay our FICA taxes for, then you're correct. If you're talking about SS as the retirement and dependent insurance program, you're wrong.

Alan Greenspan (remember him) "fixed" the program so that over the next 20 years or so, our FICA contributions are MORE THAN THE OUTLAYS. That doesn't sound like pay as you go, sounds like we're trying to save the money.

The fact that the REPUBLICAN administration and congress can't actually balance anything doesn't make SS "pay as you go."

Posted by: c. | Feb 13, 2005 8:34:48 AM

Well long term Social Security has been and will continue to be "pay as you go". The 1983 tax boost was not designed to change that underlying reality, it was more the equivalent of a college fund, it set aside money to cover the costs of the outsized demographic cohort of Boomers as they passed through the system. After that particular pig passed through the python, and presumedly had been digested along with the Trust Fund balance, the system would revert to pay as you go.

And that is the proper course. All defined benefit retirement plans are pay as you go, employers and workers pay in amounts that vary according to the actuarial need to finance future retirement checks. In 1983 we were asked to suck it up and take a 2% hike to keep those checks coming. We did and the checks continue to roll out on schedule to this day. If we needed a modest boost again I would support that, we are in this together, we are participants in the most successful social insurance program in history, and every dime has come from payroll. Prove to me that the system needs a little more scratch today to keep my check coming in starting in 2023 and we can talk.

On the other hand, if the numbers show that the system is taking in more than it needs, then we need to talk about what to do with the surplus. And astonishingly enough that is exactly the situation we are sitting in today, given ordinary productivity growth of 2.0% (Low Cost) we are looking at a Trust Fund sitting at $10.7 trillion in 2030, $20.9 trillion in 2050, and $68.6 trillion in 2080 Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2004-80 Which figures of course should be discounted for inflation, which would return $6.8 trillion in todays dollars in 2030, $9.3 trillion for 2050, and $17.9 trillion in 2080. Constant Dollars Eighteen trillion in todays dollars is a lot of money by anyones standards.

Which brings me back to "pay as you go" . The real debate going forward is not going to be about the phony "crisis", but whether we are going to continue to allow the Trust Fund to mushroom endlessly. The Boomer gap is real enough, under Low Cost we start tapping the interest on the bonds in 2023 in amounts that start small in relative terms ($80 billion not adjusted for inflation, $55 after adjustment) but grow to a cool $1 trillion a year in 2080.

Now the real irony, the only way to remove this crippling interest debt on future taxpayers is to temporaily reduce the income stream, which is to say cutting payroll taxes by an amount more than whatever level of interest being earned at the time we put the cut into place. That is we have to start redeeming the bonds. And the longer we wait the more painful it gets for Capital. Of course nothing will happen until income minus interest fails to meet costs in 2023 but at that point in time some hard choices will have to be made. Do we just pay the minimum balance (Costs - Payroll Tax) and allow the balloon to grow, or pay in from the General Fund the entire amount of interest earned and so freeze the Trust Fund in place, and just accept $400 billion a year forever, or make some extra effort to pay down the principal?

So all you gen-X'ers and Y'ers, the only way to prevent your grandchildren from taking a huge hit on paying interest on the Trust Fund is to give yourselves a payroll tax cut in 2023. Oh and continue to produce economic numbers above 2% in the meantime. Oh and BTW the better the numbers you turn in short term, the bigger the tax cut in 2023.

Quite the turnaround from "Social Security just won't be there for me".

Feel free to play with the numbers, and realize they are within the closed reality of Social Security, you will be needing that payroll tax cut to pay the increased income taxes needed to pay off the legacy of Bush general fund debt. But Social Security itself is not broke.

Posted by: Bruce Webb | Feb 13, 2005 11:23:58 AM

On the other hand, if the numbers show that the system is taking in more than it needs, then we need to talk about what to do with the surplus. And astonishingly enough that is exactly the situation we are sitting in today, given ordinary productivity growth of 2.0% (Low Cost) we are looking at a Trust Fund sitting at $10.7 trillion in 2030, $20.9 trillion in 2050, and $68.6 trillion in 2080 Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2004-80� Which figures of course should be discounted for inflation, which would return $6.8 trillion in todays dollars in 2030, $9.3 trillion for 2050, and $17.9 trillion in 2080. Constant Dollars Eighteen trillion in todays dollars is a lot of money by anyones standards.

Quite the turnaround from "Social Security just won't be there for me".

Posted by: Bruce Webb | Feb 13, 2005 11:24:30 AM

My bad, bad back button, bad.

Posted by: Bruce Webb | Feb 13, 2005 11:25:12 AM

The scariest part is the Chinese central bank buys those same kind of T-bonds in order to prop up our economy and keep us buying the 40% of their exports they sell to us. Bush is running around the country telling people those T-bonds are worthless. Don't think those Chinese bankers don't notice. The irony is Bush has most of his fortune in those same T-bonds. Somebody ought to tell him by his measure he's broke, we're broke and the Chinese own a bunch of funny money too. Of course by law those bonds are backed by the full faith and credit of the US government. But if we stay his course the US government won't have any credit in 2018 thanks to his profligate borrowing and spending. Great leaders get monuments built to remember them by. I predict if Bush gets his way on the rest of his agenda not only won't he get a big fancy statue on the mall but his grave will be repeatedly vandalized by the end of the century.

Posted by: Mark Garrity | Feb 13, 2005 12:01:40 PM

And yes debt forgiveness is only for third world countries. George is preparing our welcome to the club.

Posted by: Mark Garrity | Feb 13, 2005 12:08:16 PM

Just like to point out to Al a little som'thin' som'thin'. Al is apparently under the belief that the Trust Fund is gone, vanished, 'spent' in the President's words. Hence, it's also debt that makes the president's private accounts plan worthwhile. So here goes:

a) Whatever the costs of SS in the coming decades, the President's plan costs trillions of dollars MORE. That's true if we do nothing about SS, if we fund it fully, or if we raise the cieling on Payroll taxes or pay only half of the difference between payments we could afford (73% of promised benefits) and payments we owe. The Bush plan does NOTHING to help the shortfall, and THE WHITE HOUSE HAS ADMITTED THIS!

b) If there is no money in the SS trust fund, then it is because Bush spent it on tax cuts for the rich. There was this thing called a surplus under Clinton, and this surplus came from the Trust Fund. Clinton, you may rememeber, wanted to save this surlus for when SS ran into the red, just like Greenspan and Reagan intended when they set up the trust fund in the first place. BUSH, on the other hand, claimed that it was 'your' money, and wanted to give it all back. Except that he gave it to the wealthiest, when it was paid by the working and the middle classes.

c) Bush wants to take our money, by not paying back that loan that we (And I'm assuming this includes you, Al) paid into SS to fund it through the lean times. If you loaned me $5, you'd get upset if I said 'sorry, that money's all spent'. You'd have every right to take me to court, and you'd be a fool not to try to get that money back. Well this is $5 trillion. Worse, then he's gonna cut your benefits WAY below what SS can afford to pay in 2052, without ANY changes from right now. And that benefit cut INCLUDES what you can expect to get from the private accounts. Bush is saying that he's gonna screw you over. Why are you helping him do it?

d) If none of this makes sense to you, then you should get the facts. Check out the SS website, check out the CBO, check out what the Government says about all this. These orgs are headed by Bush appointees; If they're gonna lie, it's gonna be in the president's favor. If they say, and they do, that SS is solvent until 2052, even under ridiculously pessimistic assumptions about the economy over those next 50 years, and that SS can pay more money to each individual, in inflation-adjusted 2004 dollars, than it is paying right now with NO changes to the system, and that Bush's changes would reduce benefits (including returns from private accounts) while costing us an additional 5-20 trillion dollars, then the vast likelihood is, that the President's plan is a BAD IDEA.

So, that's that. Oh, btw, that $10 trillion figure? That's what it would take to totally fund SS UNTIL THE END OF TIME. Seriously, until Gabriel blows his trumpet at the end of all things. Until Infinity and beyond. That number is meaningless. Why would they tell you a meaningless number? Why are they lying to you? If none of this convinces you, then (with a tip of the hat to Movie Guy) have I got a car to sell YOU!

Posted by: Padraig | Feb 13, 2005 12:23:22 PM

Even if investing some of the SS Trust Fund in private sector bonds and/or equities probably will not produce the returns that are touted, it may be worth doing anyway. The mere existence of some private sector investments make it impossible to argue "There is no trust." Additionally, if the yearly SS surplus was invested in the private sector, it would put more presure on the Bush administration to actually deal with its deficit spending, since surplus would not be hiding some of the deficit.

Posted by: david1234 | Feb 13, 2005 12:31:33 PM

People keep bringing up the "ten trillion over infinity" canard - isn't that actually a great deal? Borrow ten trillion and take infinity years to pay it off?

Posted by: Jones Alley | Feb 13, 2005 12:57:14 PM

The interesting thing about the $10 trillion for infinity number is that it shows that Bush and his Conservative Right cohorts might actually not believe that the Rapture is right around the corner.

I have to admit that I have been hoping the Rapture will come soon. Imagine our country free of the Calvinists... that would take care of any shortfall.

Posted by: Mark | Feb 13, 2005 8:24:27 PM

Seems to me that if the answers to the budget problems in 2001, 2002.2003 etc were tax cuts, then, the fix for SS in 2005, 2006 till infinity is to cut the payroll tax each year. Work for me.

Posted by: dilbert dogbert | Feb 13, 2005 8:26:42 PM

I like to think of it this way. Our gross debt right now is about 65% of GDP; that includes the obligations to the SS trust fund.

With Bush's partial privatization, we piss away the SS trust fund assets, and add another 30% or so of GDP, bringing the total debt obligation up approximately to the level where it was at the end of World War II.

After WW II, a Republican President didn't complain when the marginal tax rate was up over 90%. When the debt fell to around the current level (60% of GDP), Kennedy cut the top marginal rate to 70%.

Really, I'd think conservatives would fear getting the debt back up around the level where 90% marginal rates were considered appropriate.

Posted by: Buckaroo | Feb 14, 2005 2:49:15 AM

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