* Gary Denton ([EMAIL PROTECTED]) wrote: > The New York Times repeats what I have been writing here > > conveniently avoid having to include the cost of privatization - as > much as $2 trillion in new government borrowing over the next 10 years
If you believe that benefits have been promised to people who will be retiring in the next 75 years, the $2 trillion must be paid whether or not there is partial privatization of SS contributions. It is NOT a "cost of privatization". It is the cost of SS. Depending on how you measure, SS has an unfunded deficit of between $3 and $10 trillion. The SS deficit does not show up as national debt, but it is a real enough obligation, unless SS benefits are reduced in the future. The $2 trillion being discussed here would just be taking a portion of the "off the books" $10 trillion SS deficit and formalizing it. In several ways, it is similar to what is happening with stock-option accounting. Companies issue stock options, everyone knows stock options are worth something and so it costs the companies something to issue them, but companies do not record the options as an expense on the income statements. But a new regulation will soon force them to begin recording the options as an expense. Did anything about the operation of the companies change when they formally record the expense? Of course not. It just makes it easier to find what the company is spending on stock options. Likewise, bringing some of the SS deficit onto the books makes it easier to see what obligations our government will have in the coming decades. This is a very good thing. Since SS is such a long term obligation, the politicians have a strong incentive to pretend like the obligation does not exist, since they will be long gone from office when the obligation has to be paid. We need to hold them accountable for it now. The first step to doing that is to get the obligation formally on the books. > It's bad enough that the $10 trillion is a highly inflated figure, > intended to overstate a problem that is reasonably estimated at $3.7 > trillion or even considerably less. That is baloney. Anyone who has actually looked at the figures can see that $10 trillion is a reasonable estimate. Gokhale and Smetters estimate it at more than $7 trillion last year. Sure, there is some uncertainty in predicting wage growth and longevity in the future, so if you want to be really optimistic (not generally a good idea when planning one's retirement, but lets throw caution to the wind) you can use the $3 trillion figure (which cuts off at 75 years, so there is the implicit assumption that we will reduce benefits sometime after 75 years, in other words, if you are too selfish to pay for yourself, put your obligations onto the generation being born now). So, very optimistically, we have a SS deficit of $3 trillion. That is a lot of money. At 5% interest, it would add $150 billion dollars a year to the budget deficit. If we wait, it gets even bigger real fast. We need to do something about it NOW. > strategist, the memo states unequivocally that under a privatized > system, only drastic benefit cuts - not borrowing - would relieve > Social Security's financial problem. This is not a revelation. The SS deficit is at least $3 trillion. We will need to either raise taxes a lot or cut benefits a lot to close the gap. > The year 2018 is when the system's trustees expect they will have > to begin dipping into the Social Security trust fund to pay full > benefits. If you had a trust fund to pay your bills when your income > fell short, would you consider yourself insolvent? This demonstrates the author's lack of understanding of the way a large economy works. The SS trust fund cannot be compared to a personal trust fund. With a personal trust fund, someone (not you) has borrowed your money, and somewhere down the line that money has been invested to earn a market return. In other words, the personal trust fund is financing a real asset somewhere, and so it is not unreasonable to imagine that when you withdraw money from the trust fund, it corresponds to an asset somewhere being sold and the trust fund getting a chunk of the proceeds which you can spend. In contrast, the SS trust fund has a much more tenuous link to real assets, if indeed it has any link at all. Certainly the government won't pay it back by selling assets. The government does not have real assets nearly valuable enough to redeem the SS trust fund. The trust fund is a number on a piece of paper -- years ago the payroll tax was raised, allowing the government to take in more in taxes and thus spend more on defense, subsidies, and pork-barrel projects, among other things. Very little of that higher payroll tax resulted in the creation of real assets earning a market rate of return. Really the best you can say is that the government would have spent the same amount of money whether the payroll tax was raised or not, so by raising it the government didn't need to borrow as much, and so the government had a less crowding-out effect on private investment. But this is a shaky argument, since you can argue the other way too -- the higher taxes took money out of people's pockets that they otherwise would have saved, which would have increased investment. For these reasons, it is important not to confuse the SS trust fund with a bank account. Another reason is just to think about how the government will go about "paying itself back". There are basically three options: borrow money, print money, or raise taxes. All of these have the unwanted effect of slowing down economic growth and raising inflation. Which means that to pay the following years SS benefits, the government would have to borrow or print even more money, or raise tax rates further. That is why the 2018 date is important. It marks the time that the government will start slowing the economy at an ever greater rate in order to pay SS benefits. > The facts are different: since 1983, payroll taxes have exceeded > benefits, with the excess tax revenue invested in interest-bearing > Treasury securities. Again, the author does not seem to understand how a large economy works. Treasury securities are interest bearing BECAUSE THE GOVERNMENT PAYS INTEREST ON THEM. Where does the money for the interest come from? Borrowing money, printing money, or taxes. When a person saves money, and let's say buys a certificate of deposit from a bank, then the bank loans that money to someone else who invests it in a real asset -- something that is likely to earn a market return. In other words, when a person saves money, the productive capital of the country is increased. When the government raised payroll taxes to create the SS trust fund, it resulted in very little, if any, net increase in the productive capital of the country. Mostly, it resulted in inefficient government spending. Certainly, the government doesn't save. Look at the budget, its been in deficit almost continuously for 30 years. If the government doesn't save, it isn't suprising that the government doesn't do much investment resulting in an increase in the national stock of productive capital. > (An alternative would be to, say, put the money in a mattress.) Aha! The author unintentionally hits on what essentially happened. If private accounts had been created to invest the higher payroll taxes, then the money could have earned a market return by increasing the national stock of productive capital. But it wasn't invested. It was spent, on consumption and a small amount of mostly inefficient government investments. Not any better than putting the money in a mattress, really. > The president is irresponsible to even imply that the United States > might not honor its debt obligations. Straw man. The president implied no such thing. Of course the government will pay itself back. It will borrow money, print money, or raise taxes to do it. > Mr. Bush's reason for ignoring the far more pressing problem of > Medicare while he pursues Social Security privatization is especially > tortured. If you want to talk about difficult estimates of the future, then Medicare/Medicaid is a better example than SS. One reason why Medicare appears to be a "far more pressing problem" is that medical costs have been rising at extraordinary rates, more than 12% per year recently. Much faster than the economy. If you extrapolate this growth rate over 75 years, than the Medicare obligation is enormous. But is it realistic to expect medical costs to keep going up at 12% a year, even if we do nothing? Who knows? But even if Medicare only grows at 10% a year going forward, over seventy five years it will pretty much take over the entire economy. That doesn't seem likely. That is not to argue that we don't need to tackle Medicare/Medicaid. We certainly do. But (unfortunately) Bush won the election, so he gets to choose the order of attack. Considering how much he screwed up with the prescription drug bill, it doesn't bother me to see him starting with SS. At least he has the beginnings of a reasonable plan with partial SS privatization. After all, would you rather have your retirement money wasting away under the mattress (perhaps being surreptitiously replaced by I.O.U.'s from your room-mate so he can pay off his gambling debts), or would you rather have your savings earning a market return and increasing the national stock of productive capital so that you and future generations will have an easier time and better standard of living? -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
