Confusions about Social Security (Krugman explains Bush lies)

[papau]

http://www.bepress.com/ev/vol2/iss1/art1/
http://www.bepress.com/cgi/viewcontent.cgi?article=1048&context=ev

Confusions about Social Security
Paul Krugman, Princeton University

There is a lot of confusion in the debate over Social Security privatization, much of it deliberate. This essay discusses the meaning of the trust fund, which privatizers declare either real or fictional at their convenience; the likely rate of return on private accounts, which has been greatly overstated; and the (ir)relevance of putative reductions in far future liabilities.

My poorly paraphrased summary (with a lot of personal bias in the words I have chosen) of the above pdf document is below:

If the Trust Fund is irrelavant - Then Reagan and Greenspan lied in back in the 80's as they simply pulled a fast one - raising a regressive tax on the poor and middle class so as to cut a tax on the rich. That payroll tax increase in the 80's had nothing to do with making for a stronger Social Security System?

Indeed if the Trust Fund is an illusion, then there can not be a Social Security crisis - there can only be a general budget crisis - and Social Security is no part of that now and only a small part of that in the future.

Indeed, Social Security is in trouble in 2018 only if the Congress votes to not honor the bonds in the Social Security Trust Fund - and that is not going to happen

Stocks long term history does show a 7% return (not the 9% that Bush is trying to sell as what is to be expected with "wise" investments). But competion means these things are self correcting - meaning 7% implies stocks were undervalued in the past at 14 times earnings and perhaps now are fair valued at 20 times earnings. If so, their is no reason to expect returns as high as 7% in the future, and 5% seems more likely.

And off the top will come management fees - low because of the size and government involvment - but in Britain they are about 1.1% of the assets each year (no choice - index funds only - at first means low fees - but choice meaning actively managed by the worker implies very high fees) - so 5% becomes 3.9% at most, and for Bonds earning 2% we net 0.9%, so in an account with a 60/40 split between stocks and bonds we are down to a 2.7% rate of return - not much different from the result for the current Social Security System in those silly rate of return calculations that those selling private accounts tell us are too low.

Markets ignore changes in future benefit promises - else the drug benefit passage would have sent interest rates upward. Markets pay attention to current debt levels. Does anyone think $2 trillion in new debt will not affect the capital markets and the interest rate and the economy?

While pay as you go Social Security - the present system - does little for savings or long term growth, there is little likelyhood that the disaster that is the Bush Plan, if passed, can be expected to be changed to a funded pension system (as in the Clinton add-on voluntary payroll deduction 401k accounts) later in the process. It is now or never for reasonable add-on funded private accounts.

Hopefully it is never for economic destruction via $2 trillion of borrowing for "transition costs"

[soleft]

1. Thanks for posting this

[papau]

2. I just hope it gets out past the confines of DU!

:-)

[xray s]

3. The real crisis isn't Social Security

The real crisis facing older Americans is the destruction of their private pensions and 401K accounts because of corporate mismanagement and outright fraud. The private plans of millions of Americans is under enormous threat. Just ask anyone who used to work for Enron, or currently works for an airline.

And now Bush wants to put Social Security, a well run, efficient plan untouched by scandal, into that boiling kettle of fish.