OP-ED COLUMNIST
Borrow, Speculate and Hope
By PAUL KRUGMAN

he National Association of Securities Dealers," The Wall Street Journal reports, "is investigating whether some brokerage houses are inappropriately pushing individuals to borrow large sums on their houses to invest in the stock market." Can we persuade the association to investigate would-be privatizers of Social Security?

For it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope.

Privatization would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already deep in deficit, would have to borrow to make up the shortfall.

This would sharply increase the government's debt. Never mind, privatization advocates say: in the long run, they claim, people would make so much on personal accounts that the government could save money by cutting retirees' benefits. Financial markets won't believe this claim, as I'll explain in a minute, but let's temporarily grant the point.

Even so, if personal investment accounts were invested in Treasury bonds, this whole process would accomplish precisely nothing. The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all.

How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees? By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits.

We can argue at length about whether the high stock returns such schemes assume are realistic (they aren't), but let's cut to the chase: in essence, such schemes involve having the government borrow heavily and put the money in the stock market. That's because the government would, in effect, confiscate workers' gains in their personal accounts by cutting those workers' benefits.

Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse.

First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government's fiscal health than the mere promise that government could save money by cutting benefits in the distant future.

After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren't immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen?

Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street's point of view that's a benefit, not a cost.

There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis.

If Mr. Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse.

And maybe the fact that serious financial experts, the sort qualified to be Treasury secretary, understand all this is the reason why John Snow has just been reappointed.


E-mail: krugman@nytimes.com

Krugman is a left wing nut job.

Social Security Subterfuge
Don’t be fooled by the all-new, crisis-free Krugman.
Donald Luskin


Here’s a fearless prediction: President Bush’s vision of Social Security reform with private investment accounts will be enacted into law in his second term. It’s in the bag.

What makes me so sure? Two reasons. First, I can see how much the liberal establishment fears it. Second, their arguments against it are utterly impotent.

Here’s a case in point. On Tuesday, bellwether “angry liberal

If you want a decent retirement you have to be pro-active and take care of it yourself. Shad you dont trust the private sector but trusting those idiots in washington would be equally stupid. :D

Schadenfreude & PAUL KRUGMAN

:ownd: :wave: :roflol: :laugh:

ccs178 Wrote:Schadenfreude & PAUL KRUGMAN

:ownd: :wave: :roflol: :laugh:

Hardly.

The point of the column has been missed.

Bush's proposal is simply a shell game. He holds out the promise that workers will make out much better through private accounts -- but on the other side of the equation, the goal is to save money by reducing guaranteed benefits commisurately.

The only thing workers really gain here is the assumption of risk.. and if their investments don't perform as well as proejcted ... too bad for them.

I don't have a problem with investing a portion of the Social Security trust fund in the private market.

I simply believe we should move cautiously. Let the Social Security system invest its surplus on behalf of all of us -- just as public retirement funds all over the country are already doing on behalf of their employees. That way, the risk is shared widely, not individually.

But this won't happen. The financial sector's lobbyists would not find it nearly as profitable. And making the financial sector wealthier is ulimately what Bush's "reform" is about. That -- and this ideological imperative that all individuals assume risks alone instead of protecting themselves by sharing risks.

This is a basic difference in values between the right and left.

If you want that Schad, fine. However, why should I be forced to pay into something I think is doomed to fail? Are you for forcing me to pay into SS? Isn't it my money? I understand we must all pay taxes for the operation of the government, but this is retirement, right? What right does the government have getting involved in my retirement? It's nothing but a slush fund for politicians trying to buy votes.

...and privatization works. It works in Chile and it works in Galveston, Texas. Methinks you are afraid of the uncertainty and what you don't understand. Let me clear that up for you, SS isn't working. Private retirements based on investments do as seen in Galveston.

You can go ahead and use Enron as an example of why you distrust big business, but lets be frank. Enron isn't the rule of most big business, but the exception. I also fault the idiots at Enron that put ALL of their money into Enron stock. Some big wig told them they would get more investing with the company? Hogwash, that makes them doubly stupid.

.....and while you may want to think that I am taking up for Enron, on the contrary, I want to see ALL of those morons' possessions liquidated and I want to see them sent to prison for life.


Fact of the matter is, it is not the government's right to force me to pay into a retirement fund that is dismal when those morons, R and D alike, don't. They work for us, it isn't the other way around.

Schadenfreude Wrote:I simply believe we should move cautiously. Let the Social Security system invest its surplus on behalf of all of us -- just as public retirement funds all over the country are already doing on behalf of their employees. That way, the risk is shared widely, not individually.

That would be fine if it was not originally set up as a "pay as you go" program but, as it is, it is doomed to fail. There is not a simple "asset/liability" match so there is no way that it can be considered a "pension" by any definition of the word. The system is an "entitlement" where the ball just gets bigger as it rolls down the hill.

Most "public" retirement systems now are not pensions but 401-k plans. The responsibility is on the individual to make it happen with some companies bumping the account with employer money. Similar concept here. I like 401-k plans better than pensions anyway. There is a substantive way to build real wealth where with pension plans, you are only locking in income for the future. Big difference between those two.

Don't throw Enron at me at how 401-k plans can backfire for employees. Not very many plans made you invest in company stock in the first place and those few have now been changed to allow investment diversity.

I do not want public employees playing with my retirement money and making decisions based upon political pressure or social whims. If I want to invest my retirement in guns, tobacco and companies that don't do business in South Central Ambrosia, let me. I do not want Jessie Jackson, Reggie Jackson, or even Keith Jackson having any say so over how my retirement is invested.................

Schadenfreude Wrote:This is a basic difference in values between the right and left.

I guess you've put it out of your mind SF but don't forget your side lost the last election because you have none.

Quote:Don't throw Enron at me...

He can't. Paul Krugman was a senior economic advisor to Enron.

<a href='http://www.useless-knowledge.com/1234/new/article222.html' target='_blank'>Paul Krugman Helped Bankrupt Enron</a>

Road Warrior Wrote:

Quote:Don't throw Enron at me...

He can't. Paul Krugman was a senior economic advisor to Enron.

<a href='http://www.useless-knowledge.com/1234/new/article222.html' target='_blank'>Paul Krugman Helped Bankrupt Enron</a>

:ownd: AGAIN!

RebelKev Wrote:If you want that Schad, fine. However, why should I be forced to pay into something I think is doomed to fail?

My taxes have been going to the Iraq War for a couple of years now. I expect that will continue.

You honestly think that you can equate the defense of this country with a social program that is a total failure?

The problem with liberals is that at some point along the line they got it in their heads that social security was supposed to be able to act as the sole support someone after retirement. It was never designed for that purpose.

Social security is not there to keep people living in the life style they live when they work. It's to ease the burden after retirement but eliminate it. People still have to save and plan for their future. It's not the government's responsibility to ensure this using tax dollars.

Roosevelt himself knew the system would have to contiue to be adapted, it wasn't to be cemented and kept unchanged. Privatizing it for those who wish to do so helps do that.

Economics of Social Security Privatization
By Arnold Kling 12/15/2004

Quote:"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.

Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people."
-- Michael Kinsley

Michael Kinsley is correct to be skeptical that privatization will generate a bonus large enough to eliminate the gap between the promises made to future recipients and the likely revenue to pay for those promises. In that sense, privatization will not "work." Neither will the status quo.

To a first approximation, Social Security's imbalance is not made better or worse by privatization. Instead, economic analysis suggests that the effects of Social Security privatization will be subtle and small relative to the challenges that lie ahead. A much more powerful tool for addressing the problem would be to increase the age of dependency, also known as the Social Security retirement age.



Social Security is a Transfer Mechanism

Contrary to what many people believe, Social Security is not a pension plan, in which your "contributions" go into a reserve fund, to be paid back when you retire. Instead, your Social Security taxes are used to pay current beneficiaries. In return, you receive a promise from the government to tax future workers in order to pay for your benefits.

Social Security's long-term problem is that the ratio of workers to retirees is falling, so that the tax rate on workers must rise. In the near term, some of this drop is due to the aging of the Baby Boomers. However, more fundamentally, it is due to the steady increase in longevity, part of what Nobel Laureate Robert Fogel calls "technophysio evolution."

Compared with the 1930's, when Social Security was enacted, we are living almost 15 years longer, while the Social Security retirement age has been raised only a few years. Because of the failure to index the dependency age to longevity, the ratio of recipients to taxpayers has climbed to levels that are difficult to sustain.



Privatization's Primary Effect

If private accounts were created, then as a worker some of your contributions to Social Security would be diverted from current beneficiaries in order to go into accounts under your control. This would make Social Security more like a pension plan and less like a transfer scheme.

However, if your contributions go into your own account, then payments to current beneficiaries have to come from somewhere else. Chances are, most of the money would be borrowed by the government. This additional borrowing often is referred to as a "transition cost."

The "transition cost" is not a real cost. It is an accounting change, in which off-balance sheet obligations of the government (the promises that are made to you under the current Social Security system) are exchanged for on-balance sheet debt. I have used the analogy that Social Security's unfunded liabilities are like a worn-out roof, and privatization is like paying for a new roof. If you were not counting the worn-out roof as a liability, then it may appear that there is a "transition cost" to fixing the roof. In fact, the cost of not fixing the roof is just as high or higher.

On the other hand, using debt rather than payroll taxes to fund current beneficiaries would have one important real effect. It would shift the overall tax burden away from payroll taxes and toward general revenues, which means primarily income taxes. Thus, the transition toward privatization would make the funding of Social Security more progressive, meaning that relatively more burden falls on the rich and relatively less falls on the poor. In that regard, it is somewhat surprising that the Left opposes privatization and the Right supports it.



Subtle Effects

There are some subtle effects of privatization that might change the accumulation of capital in the United States. The potential magnitude of these changes is difficult to assess.

One effect could be to shift the composition of portfolio holdings so that Americans invest more in stocks and less in bonds. If stocks are under-valued, as they have been historically, this would improve the allocation of capital in the United States. To believe that this will happen, you have to believe that U.S. capital markets are inefficient today, and that their efficiency will be improved by steering more people toward ownership of stocks. Greater efficiency would increase economic growth, which, as Kinsley points out, is a way for privatization to improve the outlook for the future. Conservative economists are inclined to view markets as efficient, so that privatization would not cause such a portfolio shift. Therefore, this is another argument for privatization that is more likely to be supported by the Left (for example, Berkeley economist Brad DeLong) than by the Right.

Another effect could be a shift toward less government spending or higher taxes in the near term, because of Congressional concern with the higher deficits that otherwise would accompany the transition to privatization. If Congress behaves this way, then by the same token in the long term these effects would be reversed. That is, in the long term privatization would reduce the government's Social Security obligations, leaving more room for higher spending or lower taxes.

Finally, privatization could increase the incentives for work and thrift. Under privatization, if you work harder and earn more, this increases the funds in your own account. If you are relatively more dependent on your own saving and less reliant on government support, then you have a greater incentive to save. Anything that increases work and thrift tends to raise economic growth. Harvard's Martin Feldstein has argued that these effects could be quite large, on the order of hundreds of billions of dollars per year in higher national output for a complete transition to privatization.

Social Security threatens to become an increasing tax burden on young workers, primarily because the age of eligibility to receive benefits has lagged behind increases in longevity. Privatization does not alter that situation. It serves primarily to shift the funding mechanism for current beneficiaries, moving it away from payroll taxes and toward personal and corporate income taxes. Privatization may increase economic growth by stimulating work and thrift, and perhaps also by increasing the value of stocks relative to bonds and by putting pressure on Congress to reduce spending or increase taxes in the near term. To the extent that these mechanisms do raise economic growth, the overall burden of Social Security on young workers will be reduced. However, it is by no means certain that the increased growth will be sufficient to make the burden bearable as the ratio of workers to retirees continues to fall.

Road Warrior Wrote:

Quote:Don't throw Enron at me...

He can't. Paul Krugman was a senior economic advisor to Enron.

<a href='http://www.useless-knowledge.com/1234/new/article222.html' target='_blank'>Paul Krugman Helped Bankrupt Enron</a>

Before we completely dismiss Paul Krugman lets remember there are two sides to every story. The Enron story link that was listed took us to a blog that was entitled rather aptly " useless-knowledge.com"

Here is a link that explains Krugman side of the story on the Princeton University web site.

<a href='http://www.wws.princeton.edu/~pkrugman/enronfaq.html' target='_blank'>Krugman Princeton Web Site Enron Q&A</a>

For those of you that lack the time to check it out, you can read an his description of the Enron Economics board below. If he bankrupted Enron by his particiption on that board he had plenty of neocon help

"That Enron board, when I was on it, did not strike me as a board of pundits. It included Larry Lindsey and Bob Zoellick - future Bush administration officials, though I had no way of knowing that, but certainly not journalists. It also included Pankaj Ghemawat, a strategy professor at Harvard, and Irwin Stelzer, an economist at the American Enterprise Institute. (Stelzer had a column in the London Times, but I didn't know that) The only person there I thought of as a journalist was William Kristol - I thought he was there to regale us with Washington gossip. And I regarded myself as being in the same category as Ghemawat - an academic expert, who was there because of his expertise."