Brad DeLong's Semi-Daily Journal: A Weblog

Bush's response is clever. "Seniors" presumable means current seniors, folks already drawing a benefit. I suspect that's right. It's me he's after, not mom.

Anne argues that the baby-boom is too politically powerful to cross, so maybe Rove will tell Bush to stop it if he gets too giddy about changing Social Security.

Froomkin has patently caved to the fundie attacks directed his way as Dubya's campaign craters. Just look at the language he uses -- "embraced," "sordid,""groundless." Worse, Froomkin apparently doesn't understand concept one about the debate over the privitazation of Social Security. Why is he still working for the Washington Post.

Dubya's speech offers all of the hallmarks of a pathological liar. Its specificity is breathtaking - "We will keep the promise of Social Security for all our seniors." Note, not "We will keep the promise of Social Security," but instead some much smaller promise out of which he can weasel at a later time. Froomkin hasn't got enough sense -- or enough courage -- to note what Dubya is trying to do. He doesn't even have enough sense to note that Dubya's plan will require ponying up $2 trillion sooner rather than later (much, much later according to recent Social Security analyses) without any idea whatsoever where the money will come from. A faith based Social Security plan comepletely unhinged from reality. What else can anyone expect from Dubya?

This is campaign reporting at its absolute worst.

On a lighter note:a pre-vote on privatization
http://cbs.marketwatch.com/news/story.asp?guid=%7B89B65368%2D4913%2D4B32%2D99A5%2D96451E98F579%7D&siteid=mktw

sorry the html editor on this site isn't working, if there is one

"so maybe Rove will tell Bush to stop"

Win or lose this is Bush's last election. I doubt Rove is planning anything past November 2.

On a lighter note:a pre-vote on privatization
http://cbs.marketwatch.com/news/story.asp?guid=%7B89B65368%2D4913%2D4B32%2D99A5%2D96451E98F579%7D&siteid=mktw

sorry the html editor on this site isn't working, if there is one

"We will keep the promise of Social Security for all our seniors"

I wish we wouldn't. Payments to people who don't need it are what is breaking the system. I don't mind a safety net, but I find transferring money from workers to middle class and rich retirees a bit galling.

I'm glad my parents get both Social Security and Medicare benefits, even if they are middle class retirees. They paid into the system during their working years, and to say they somehow don't deserve what they get now is a bit galling to me.

Obviuously the attack is groundless from Kerry due to the fact that it requires Bush to go on record with a statement lacking any depth regarding his plan, efforts or commitments about Social Security and its future.

If he truly has a plan - he should post it rather than continue making global generalities - neither supportable nor verifiable.

In the past Bush had made assertions about tax cuts we can afford, about WMD that would be found, about protecting Social Security funds , about reducing the deficit, about job creation, etc., etc. come to think of it is there any major item of policy Bush has not lied about?

I know I can not believe anything regarding major policy that the president postures.

And even if Kerry has moved to 'groundless' attacks, I say fight dirty with dirty - they throw muck and suddenly when we sprinkle a little talcum powder he mews 'Kerry will do anything to get elected!' This from the son of the 'Willie Horton' ad creator, from the cousin of the 'Swift Boat' ad designer!
I actually wrote to the Kerry campaign they had my permission to fight dirty - it's not time to be an altar boy!

Since 1983, payroll taxes for the baby boomers have gone both to providing for the current generation of retirees and for building a surplus that would allow proper Social Security payments for the baby boomers even though the following generation is far smaller. The promise has been made, the cost borne by the baby boomers, a change due to setting up private accounts seems impossible unless the accounts are funded by raising government debt. Setting up private accounts that ask a cut in baby boomers Social Security benefits, seems politically impossible.

A more ominous problem with Social Security is the eating up of cost of living increases by the increases in Medicare charges.

Kerry's attack is "groundless" because it conflicts with the new reality that Bush has created by saying the opposite. While Kerry is examining the reality of Bush's statement, Bush is busy creating a new reality, which Kerry will then study while Bush creates etc. etc. etc. In the same way, any attack that contradicts the President is without merit because it reflects an outdated worldview. BC04 is an empire now. Don't you see?

http://www.nytimes.com/2004/10/20/politics/20benefit.html

Social Security Payment Will Increase, as Will Medicare Bite
By ROBERT PEAR

WASHINGTON - Social Security benefits for more than 47 million Americans will increase 2.7 percent next year, the government announced Tuesday. But higher Medicare premiums will take nearly half of the increase for a typical beneficiary.

The squeeze on Social Security payments reflects the fact that health costs are rising much faster than consumer prices in general.

The annual cost-of-living adjustment for Social Security is based on the rise in the Consumer Price Index. Medicare premiums, by contrast, are set at the level needed to finance about one-fourth of the cost of Part B of Medicare, which pays for doctors' services and other outpatient care.

Social Security officials said the average monthly cash benefit for retired workers would rise to $955 in January, from $930 this year, an increase of $25 a month.

But the Bush administration announced in September that the monthly Medicare premium would rise $11.60, or 17.4 percent, to $78.20, from the current $66.60. The increase in Medicare premiums will thus take 46 percent of the increase in the average Social Security benefit for retired workers.

Most elderly and disabled people have their Medicare premiums deducted from their monthly Social Security checks.

William D. Novelli, chief executive of AARP, the lobby for older Americans, said, "Far too many Social Security beneficiaries will see the Social Security cost-of-living adjustment partially or completely eroded by the Medicare premium increase." For 8 out of 10 retirees, Mr. Novelli noted, Social Security is the primary source of income.

Retirees, like other consumers, also face the prospect of higher heating bills this winter. Those costs, like medical costs, are increasing faster than Social Security benefits.

Representative Pete Stark of California, senior Democrat on the Joint Economic Committee of Congress, said, "Nearly 13 million beneficiaries will have half or more of their cost-of-living adjustments taken away by the increase in Medicare premiums next year."

Bush's intentions regarding Social Security are like Mary Cheney's sexual orientation. Indisputable, but how rude of Kerry to raise the issue.

i like the way that sebastian objects to social security being provided to "middle class" folks (i'm not flat out opposed to a means test that might eliminate 5% of social security recipients, the truly high-wealth households, although that's a discussion for another time).

So let's see: middle class people (that would be, in today's dollars, households earning roughly $45K to $85K) who spent their entire working lives on the assumption that social security would (as it can, with no problems) provide a baseline level of support for them in their senior years, augmented by savings, cashing out home equity by trading down, and pensions, are the "problem" with social security.

Methinks sebastian doth protest too much: given the uncertainty of pensions past (i grew up in allentown, next to bethlehem steel, and through my parents, i'm intimately aware of people who have lost their bethlehem steel pensions through no fault of their own) and present (since defined contributions have now replaced defined benefits virtually everywhere), the uncertainty of housing values, and the inability of most people in that income bracket to save at a sufficient level to have a comfortable retirement, social security as social insurance makes plenty of sense for middle-class households, and isn't destroying the system. (In fact, of course, nothing is destroying the system, and it's relatively easy to imagine solutions to the long-term of social security; it's medicare that's the problem.)

Before there was social security, by the way, the standard solution in america was that either one child sacrificed his or her life in order to live with his or her parents and care for them until death or the parents moved in with the children. Neither party was happy with this inter-generational bargain, and there is no great groundswell of support for returning to it, for good reason.

meanwhile, what unnamed administration official says.

Does "basically groundless" differ from mere "groundless?" ..."appears" to have "finally embraced"? ..."sordid" truths? ...Call the Cliche Squad! How do these people end up writing for "major" newspapers?

Considering that Bush policy follows upon white papers from the goofy K street clowns, many of whom want to end Social Security in addition to much else, Kerry's attack would be "basically grounded."

In related news, Bushie has the clods all worked-up about gay "marriage", while he sodomizes them fiscally.

And even if Kerry has moved to 'groundless' attacks, I say fight dirty with dirty - they throw muck and suddenly when we sprinkle a little talcum powder he mews 'Kerry will do anything to get elected!' This from the son of the 'Willie Horton' ad creator, from the cousin of the 'Swift Boat' ad designer!
I actually wrote to the Kerry campaign they had my permission to fight dirty - it's not time to be an altar boy!

Our parents paid for the Social Security benefits of our grandpanrents. We are paying for the benefits of our parents. Our children will pay for our benefits. The baby boomers have been asked to take on a larger obligation for themselves, because they are so much larger in number than the following generation. Benefits that are given have been well earned by each generation.

A Congress that tampers with Social Security benefits of a coming generation of retirees, will be a Congress that is dismissed on elections.

Do you really believe Bush has a "secret plan" for Social Security? What grounds are there for that belief?

Because that's what Kerry said on Sunday.

I was not saying that Bush doesn't have the intention to redirect some Social Security taxes to private accounts. He clearly does. But I don't see any evidence of a "plan" at all -- secret or otherwise. (More's the pity; it would be nice to be able to argue about it.)

That's what I was suggesting is groundless, the "secret plan" assertion. Wouldn't you agree?

Is unnamed administration official pulling our leg - or what he serious when he said Kerry's critic flies in the face of everything Bush has said. I guess if Bush said the earth was flat, all ships would have to stop right where they are.

Brad,

In your mind, what is the best way to go about privatizing the system? Would it be partial, or full?

And this may seem like a ridiculous question, but I'm curious nonetheless: by agreeing to it, do you feel like you are giving up more and more to those on the right? In some ways, that's what this would feel like to me.

It is the current 'Gore is lying' meme.

Froomkin is probably right that the Bush Admin has not settled on any specific plan. But if there is no plan, then the story is that Bush is babbling meaningless campaign promises, and he is dishonestly implying he has some plan when he doesn't. Alternatively, he could have several plans on the shelf, and they all will require some combination of transitional tax increases and future benefit cuts. The story is arguably not about Kerry, who is underlining the unreality and/or illogic of Bush's statements about Social Security.

Max Sawicky
Economic Policy Institute

Is there a plan -- probably. the broad options are pretty well known. See the Wessel column in the WSJ. Are the details of the plan being kept secret -- i would say so. Bush wants to debate this on the level of generalities (social security is broke, i have a plan to fix it), not on the specifics. Any fix involves cutting someone's benefits, and finding a way of financing the gravy of private accounts. Bush does not want to spell out the whose benefits he plans to cut and how he plans to finance it -- I would argue that is intentionally being kept secret. And the trustees latest forecasts show that social security is, with the current set of taxes, fully funded until 2042 at current benefit levels, so long as the government does not default on the trust funds bonds. Any fix with private accouts that does not cut benefits substantially will leave soc security with a financial hole much sooner -- something bush probably also does not want to confront. If bush spelled out his plans in detail, it would be unfair to say it is secret, if he speaks about his intent in code words understood to those who want major reforms, i think it is fair to call the plan something of a secret. his intention is no secret, but his actual plans (the painful options) are intentionally being left out.

as for the draft argument, the WSJ article today on the army not meeting recruiting goals is worth reading. at a minimum, bush has a 12 division strategy for a 10 division army, hence the use of the reserves, and the related difficulties recruiting future reservists ...

If Bush announces we're going to leap off a cliff, but doesn't answer how we're going to avoid crashing at the bottom, we can infer that his answer to that question is a secret. (We are permitted to invoke the natural reality of gravity and know thereby that it is a valid question that has to be addressed.)

Likewise, we are permitted to invoke the natural reality of arithmetic and demand to know how Bush is going to pay for this huge new federal retirement program. If he doesn't answer out loud, then his answer is a secret.

If SS is going to be partially-privatized, there will be less money coming in to the fund that pays out current premiums. By the laws of arithmetic, this means that SocSec will have to (a) run a deficit, (b) raise premiums, or (c) cut benefits.

I think (a) is illegal for SocSec as it's currently written, but I don't think that would stop this administraiton.

But in any case. If Bush is going to privatize SocSec, some combination of (a)-(c) will happen. This deduction is a straightforward application of arithmetic to any assertion that SocSec will be privatized. But which of these will happen? The answer to that question is -- by the laws of arithmetic -- an intrinsic part of the plan to privatize SocSec, and as Bush hasn't given that answer, it is therefore a secret.

my god, we've got max and dan froomkin here, so i feel abashed to even speak up, so first, let me generally agree with Max.

after all, let's not forget that bush put together a commission to come up with a palatable way to partially privatize social security, and although it failed, it's clear that he is interested. this has been a gop talking point for years, and if there's one thing we know with certainty about george bush, it's that he believe gop talking points. and i, for one, don't doubt that suskind was accurately informed as to what bush said in that meeting.

so yes, i have no doubt that bush wants to privatize (or "partially privatize" social security), and he doesn't want to talk about, merely claim a mandate to do it if he wins.

and dan, surely you aren't among those who believed, in august, '02, that bush didn't intend to invade iraq (especially after cheney's vfw speech), whether the actual battle plan was fully drafted or not.

(ps, speaking of draft, it's the same matter. bush stamping his foot and saying i'm not going to do it obviously holds water for many - not for dan, of course, whose work i enjoy - but that don't make it so. whether he has a "plan" for a draft or not, the inexorable logic of his policies is for a bigger military, and he refuses to discuss this, instead citing such inanities as the notion that we could handle another military engagement right now....)

Bush may not have a secret plan to cut SS benefits, but he doesn't need one. Alan Greenspan already explicitly called for the cuts.
The bottom line is that simple arithmetic dictates Bush will likely cut benefits, and with Bush's credibility well completely dried up, there's no reason not to trust Kerry.
It's just like the draft. The mere fact Bush is mentioning the draft, even to deny it, is scaring the shit out of young people,
as it should.

There can be no real plan, for if private accounts are to be formed that will draw off hundreds of billions of dollars from funding current retiree benefits, the benefits will have to be provided in another way. There will be lots more debt or there will be a tax increase. Imagine cutting Social Security for the baby boomers, when Medicare costs are increasing steadily. Politically, this simply can not be possible.

For the folks who talk about some Bush "secret plan": Math is math. If you subtract funds in order to create "social security investment accounts", but don't add funds by, say, extending the social security tax to all income (not just the first $80K), you'll have to reduce spending -- and spending in this case is reduced benefits for recipients, either current recipients or future recipients.

Some folks just need to report to remedial math class. Unfortunately, when our President is one of those folks...

Actually, CBS Marketwatch has had two stories recently expressing considerable ire at Kerry and even more at Bush for the distortions about Social Security.

After Bob Schieffer told us that "everyone knows" there's a crisis in SS, Irwin Kellner pointed out that it ain't so, in a piece entitled "Social Insecurity"

Then Paul Farrell lashes out at Wall Street's interests in privatization...he really sounds mad! He gets going by saying:

"Based on past research, this is how I suspect special interests would justify voting in favor of privatization, assuming we could get Wall Street and others to tell us honestly why they feel so passionate about the issue..." and then lets them have it for their transparent and crass self-interest.

Go Paul!

So, somewhere the financial press is trying to do a better job on this issue than Bush (outright lies) and Kerry (spinning doom, though not without a basis in fact).

I'm not sure I'm the right guy to reduce things to their simplest form, but let me try. Private accounts will draw off from $1 to $2 trillion in contributions from the Social Security trust fund over the period of transition. Bush says there will be no increase in SS contributions. Bush says there will be no reduction in benefits. Either Bush is not telling us something (about a plan, at least in some element of which is secret), or he is completely full of crap. So here is a guy who was completely full of crap in his pledges about fiscal policy, and about a Social Security "lockbox", 4 years ago, and about the fiscal and labor market impact of tax cuts in more recent years, who has embarked on another round of pledges about taxes, spending and Social Security, and the most cogent, interesting thing about this situation is that Kerry has engaged in "baseless" hyperbole?

Mr. Froomkin, in the world of Swift Boat nonsense, a world in which Bush is using what boils down to fly-trap arguments (Zarqawi "must be defeated there, so we do not face him here") in order to assert that Kerry misunderstands terrorism, a world in which Bush claimed not only that Saddam had illicit weapons, but that he was in a position to use them against the US, a world in which a major news organization concludes that distortion is a central part of the Bush campaign, but not the Kerry campaign, the thing you choose to call baseless is a bit of a stretch about Bush's plans for Social Security?

Mr. Froomkin, if your assertion about Kerry depends on Bush being completely full of crap in his claims about Social Security, then shouldn't you be saying that in your original article -- not on a web log, now matter how highly esteemed? Coming around here to assure us that Bush hasn't hoodwinked you, No Sir! not a bit!, is rather beside the point.

Bought and paid for, that would be my guess.

Max Right, Dan Wrong, on this one.

And why are Bush's reported statements' off limits, while Kerry's apprently are not? It was interesting that the first denials of the Suskind story were that Bush didn't say the word "privatize," not a blanket denial that he had no intentions along that line. Sounds like a classic non-denial denial to me. After a few days, a more comprehensive, but not categorical denial came out. Correct me if I am wrong on this.
Both Bush and Cheney are peddling the subliminal line that SS is in big trouble and maybe something drastic might be necessary. I remember that when the topic came up in the VP debate, Cheney said something to the effect that his crew would all that they could to save the system -implying that there is a big problem that maybe can't be fixed. But there is no big SS problem that cannot be fixed, unless the US administration has plans to wreck it... while claiming that they did all they could to fix their own manufactured wreck and wringing their hands and sympathizing with middle class and poor people who have had their social contract broken to bits.

The Bush Cheney SS run around seems like a legit story to me.

BREAKING NEWS: Pat Robertson is shrill!

It's been widely reported that in a recent interview, Pat Robertson noted that G W Bush had told him, before the invasion, that there "wouldn't be any casualties" resulting from an invasion of Iraq.

But now the Bush campaign has made it clear that Robertson is just one more shrill distorter of the truth, whose falsehoods are trumpeted by the liberal-dominated media. Marc Racicot, on CNN's Paula Zahn, assured the American people that there was no issue here: "The White House has made the matter clear: the President said no such thing".

Truly, it's shameful how the media accept the word of known far-left-wing agitators like Robertson over clear, consistent, forceful statements from "I-never-said-I-wasn't-concerned-about-OBL" Bush and "I-never-met-you-before-tonight" Cheyney!!

awesome post, kharris. i had tried to say something along those lines earlier on, but you put it just right.

Didn't Greenspan's 1983 commission come up with the plan to increase payroll taxes up to 87k saying that would cover any ss furture shortfall?
And though the govt has borrowed from that money issuing future ious in order to pay down the current annual deficit? And didn't the current annual deficit arise in large part because of the tax cut that Bush gave to "the highest income bracket." So hasn't the money paid in for future ss by current wage earners subsidized "the rich" whose money would have lessened the deficit had they not been given the tax cut? And Greenspan, who chaired the commission in 1983 which increased the payroll tax with the promise that that would take care of social security for the forseeable future, and who backed the Bush tax cut, has chosen to now say, "No, don't end the tax cut. Let the wage earners continue to subsidize the rich. And while we're at it, let's penalize the wage earners by raising the retirement age and cutting back on ss cost increases." Isn't this the way it is, and if it is, isn't the middle class getting screwed?

Let us put Dan Froomkin on the couch. He does the job he is paid for and finds a weird construction under which he can claim that Kerry is making it up about social security and Bush. That pleases his bosses. All reporters must be even handed, but some politicians need more even hands than others.

Then he comes over here and says that he is misunderstood and parses his own sentences. He would like some respect. Sorry Dan, you earn it every day.

Or not.

Jim, yes, Greenspan is evil.

Well, luck might be with us... maybe the whole Bush-Cheney-Rove contraption is about to go down the tubes. An AP story says that Bush is in Las Vegas, but decided not to show at the AARP convention there, for reasons unexplained. The first lady will handle it.

Pat Robertson says that Bush said that the Iraq thingee would be bloodless, and now the WH has to delicately call Robertson a liar.

Yahoo news says some kids' poll chose Kerry in a landslide. These were young kids too, looked like grade school age, so they should be VERY VERY bitter about the existing social security commie con and Ponzi scheme. So if Bush can't even keep those folks... well...

If both the elderly and grade school kids turn out to be reality-based communities, might mean trouble come election time. Need to work on those white middle and working class males. Being part of that club, I know from personal knowledge that they are the least likely to part of the reality based community. Let's see if their wiser elders and youngers can put the squeeze on those poor benighted testosterone junkies and save their retirement bacon for them just in the nick of time.

I have a couple of questions; perhaps someone can point me in the right direction.

The current system implements an inter-generational transfer from the young to the old. If today's elderly had instead saved for their retirement, they would now want to dissave, which they could do only if the young were willing to buy their assets. Since that savings must reduce consumption, why isn't the savings plan effectively an inter-generational transfer of the same magnitude?

The current system implements an inter-generational transfer on a group basis. Is there any reason to believe that if SS disappeared today with nothing to replace it, that the transfer would suddenly cease? I mean, if your dear old Mum is suddenly destitute, wouldn't you help her out financially? Is there any evidence that the size or nature of the transfers would be different than what occurs under SS?

This is not complicated,guys. Kerry is simply trotting out the standard "Republicans are going to take away your SS checks" scare tactic as they have done every election cycle for as long as I can remember.

We already HAVE private retirement accounts. We have IRAs, 401Ks, and plain old savings accounts.

So for Bush to say he wants to replace Social Security with private accounts, when we already HAVE private accounts, is a word trick that means he wants to get rid of Social Security.

Micheal,

First question: In the current system, young people simple transfer 12% or so of their wages to the elderly and get nothing in return (except a promise by the government to force their children to pay them when they retire). In the case of seniors "dissaving", the young workers would get a productive asset in return for their wages. There is a change of ownership of an asset, not a unidirectional transfer of wealth.

Second question: This would be a cruel means tested system. You would not transfer any of your wages to "dear old mum" unless she really neaded your help. So, the total amount of intergenerational transfers would be much less than under the current system, is seems to me.

People who treat as plausible the idea that privatized SS accounts invested in common stocks will give their holders a higher return than they'd get from the current system don't seem to understand that when you buy a share of stock, you are hardly ever "investing" in a company. Rather, you're buying "used stock" that someone else either got by investing in the company long, long ago -- or just got for free by exercising a stock option. Since P/E ratios are so high and dividends so low, you're not "investing", you're speculating that someone else will someday want to buy the stock from you at an even higher price. Unless by that time the company has started paying dividends at an attractive rate, your speculation will pay off only if you can find an even greater fool.

But the obvious problem with SS is that the worker:retiree ratio is falling, and that means that there will not only be fewer wage-earners paying into the system in the future, but also that there will be fewer wage-earners to buy the stocks retirees are trying to sell.

Regardless of how we try to arrange the finance of our retirements, the underlying reality is that the goods and services to be consumed by future retirees must be produced in the future. We cannot stock them up. Therefore, the average standard of living that retirees will enjoy in the future will be determined entirely by how many workers there are per retiree, how productive those workers are, and whether what they produce can be consumed domestically (or has to be exported to pay off debts owed to foreigners, or as profit taken by foreigners who have bought up US assets).

So the only thing changed by differing methods of finance is how the rights to the goods and services are distributed among the people. The reason I wrote "average" above is that the most likely outcome if SS is privatized is that the guys on Wall Street will make off with a large fraction of the money just as they did in the late '90s.

jm,

I disagree with much of your post:

***”when you buy a share of stock, you are hardly ever "investing" in a company. Rather, you're buying "used stock" that someone else either got by investing in the company long, long ago”***

Even though one buys an existing share of a corporation, one is still buying an ownership right to the corporation, entitled to a share of its earnings. Sounds like an investment to me.

****”or just got for free by exercising a stock option. “***

Stock options do not result in free stock. They merely confer the right to purchase shares of stock at a fixed price for a period of time (the holder hopes it is a price below market value)

****”Since P/E ratios are so high and dividends so low, you're not "investing", you're speculating that someone else will someday want to buy the stock from you at an even higher price. Unless by that time the company has started paying dividends at an attractive rate, your speculation will pay off only if you can find an even greater fool
”*****

While it is possible to find stocks that should be classified as speculative ( most of the dot com stocks of the ‘90’s bubble fit that classification), shares prices are really the present day value of the market’s judgment of the future earnings and growth of the corporation, discounted to provide a rate of return to compensate for the perceived risk. If the corporation continues to earn and grow, one can sell the shares at a higher price since they do, in fact, represent more value.

A corporation does not have to pay dividends to increase in value. If they retain all their earnings on their balance sheet or use it to fund expansion or productivity improvements, the value of the corporation will increase and its share value will reflect that.

****”but also that there will be fewer wage-earners to buy the stocks retirees are trying to sell.”****

The retirees are not limited to selling their assets to U.S. workers making less than $80,000 and investing 12% of their wages. They may sell to workers earning millions world wide and perhaps investing 90% of their earnings.

****”the underlying reality is that the goods and services to be consumed by future retirees must be produced in the future. We cannot stock them up.”****

Well…we can, sort of. If wages are diverted today from consumption to the creation of productive assets, those assets can be used to produce goods and services in the future for consumption. An indirect way to “stock up” goods and services. We can have an argument about how much more capital invested world wide can compensate for fewer workers in the future.

Robert Brown wrote, "Even though one buys an existing share of a corporation, one is still buying an ownership right to the corporation, entitled to a share of its earnings. Sounds like an investment to me."

You're missing the point that jm was presumably making. That is, purchase of a stock does represent an investment for the buyer, but it represents no new investment for the economy as a whole, unless you're purchasing new shares.

"...shares prices are really the present day value *of the market’s judgment* of the future earnings and growth of the corporation..."

And the market's judgement is fallible, as clearly seen by the tech bubble.

"They may sell to workers earning millions world wide and perhaps investing 90% of their earnings."

*90%*? Which workers are those?

Liberal,

****”You're missing the point that jm was presumably making. That is, purchase of a stock does represent an investment for the buyer, but it represents no new investment for the economy as a whole, unless you're purchasing new shares.”****

Not true. The seller of the existing shares receives cash for her shares which represents new money for investment in the economy. She may spend her cash on consumption, of course, or she may lend it to a corporation by buying a bond, or participate in a stock offering of a company seeking to expand. The transaction does not have to be direct to result in the “new investment” you allude to but may be many transactions removed.

****”And the market's judgement is fallible, as clearly seen by the tech bubble”****

Thats why share prices are discounted to provide a higher return to compensate for the occasional misjudgment.

****”*90%*? Which workers are those?”****

I am speculating, but I would suspect that a lot of people earning a million dollars after taxes may well invest 900,000 and still have 100,000 to spend on consumption.

KHarris, as usual, makes the point perfectly:

- I'm not sure I'm the right guy to reduce things to their simplest form, but let me try. Private accounts will draw off from $1 to $2 trillion in contributions from the Social Security trust fund over the period of transition. Bush says there will be no increase in SS contributions. Bush says there will be no reduction in benefits. Either Bush is not telling us something (about a plan, at least in some element, which is secret), or he is completely full of crap. So here is a guy who was completely full of crap in his pledges about fiscal policy, and about a Social Security "lockbox", 4 years ago, and about the fiscal and labor market impact of tax cuts in more recent years, who has embarked on another round of pledges about taxes, spending and Social Security, and the most cogent, interesting thing about this situation is that Kerry has engaged in "baseless" hyperbole? -

Either Republicans mean to undo Social Security by adding more than a tillion dollars in debt, or there can be no privatization of Social Security and the suggestion of any such plan is nonsense.

Hey, if they do privatize the Social Security accounts, I would feel better if they let an honest broker handle this windfall.
I suggesst Neil Bush to handle these zillions.

Robert Brown:

You make all the conventional points, of which I am well aware and have pondered more than a little.

Alas, the day job interferes, so my replies must be very rushed.

Employee stock options are in far too many cases free stock. Moreover, to reduce dilution of the P/E, corporations that issue them usually offset them by purchasing an equivalent amount of stock in the open market; "net net", it is as if they had given the amount of the sale directly to the employeee as a bonus.

You write that, "A corporation does not have to pay dividends to increase in value. ..." Quite true, but I have an intense suspicion that if you were to carefully survey the field you would find that many non- or low-dividend-paying companies grow for a time and then sink into oblivion, never having paid out any meaningful return to the "owners" overall. The only stockholders that make money from these companies are the ones who buy on the way up, and all their profits come out of the poskets of those who buy on the way down, not from the business.

Future worker productivity relevant to the needs of future retirees will be there only if we invest in the right things. I think we aren't, due to the pernicious distortions of markets by the Fed and the Asian central banks.

jm's original comment touches upon two interesting points.

First, the underlying motivation for “privatization” of social security funds is an assumption of increased profits. Someone got the bright idea that since the stock market generally has returns of 10% per year, but the funds in social security have lower returns than that, if we just let people invest funds directly into the stock market then there’s a net increase in social security funds. Sure, some people will invest poorly and wipe out that portion of their retirement, but on the whole, people will be better off.

There’s a serious flaw in that thinking. The non-partisan Congressional Budget Office looked into the cost of set up and administration, and concluded that even if everyone did realize a 10% gain, the increase would be more than wiped out by the overhead of managing millions of individual accounts. In short: there is NO ECONOMIC ADVANTAGE to social security privatization.

Second, social security needs to be understood in the context of the age structure of the US population. The US dependency ratio (that is, how many folks the working people are supporting -- the workers v. children plus retired folks) is about to change dramatically. With fewer people working, there will be fewer income dollars to fund social security. Ok. We’ve all heard that before.

A big question for the US: what will the fertility rate be moving forward? We're back up to a TFR of 2.1, which is population geek speak for “on average, women have 2.1 children”. 2.1 is the right number for the population to replace itself without growing or shrinking (needs to be just over 2.0 due to deaths prior to child bearing.) The US fertility rate isn't constant across the whole country, of course. It's a lot higher for recent immigrants, Hispanics, African Americans, and Mormons, to name just a few. Will terrorism policies that make the US a less attractive place to immigrate to change our birth rate? What about unemployment? Which groups change in which ways? What happens if medical advances let the population typically live to 85 or 90? When we talk about projections for social security in the future, we’re also implicitly making a lot of assumptions about the age structure and the dependency ratio. The headlines and news reports skip across the surface. Understand there’s a lot of guesswork underneath.

I must confess a chill runs thru me whenever I hear the words, 'secret plan to....' Bush has one we hear to 'fix' SS. My recollection hinges on Nixon's secret plan to end the war in Vietnam. Ouch. lots of dead people came out of that scret plan.

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Robert Brown wrote, "Not true. The seller of the existing shares receives cash for her shares which represents new money for investment in the economy. She may spend her cash on consumption, of course, or she may lend it to a corporation by buying a bond, or participate in a stock offering of a company seeking to expand. The transaction does not have to be direct to result in the 'new investment' you allude to but may be many transactions removed."

So what? *The transaction itself does not represent any new investment in the economy*. You have no idea what the seller of the share is going to do with the money. Before the exchange, A has $M and B has N shares of stock. After the exchange, A has N shares of stock, and B has $M. Nothing whatsoever can be inferred from the this exchange on the net impact on investment. It's true that B has $M more to make a "true investment". It's also true that A has $M less.

"Thats why share prices are discounted to provide a higher return to compensate for the occasional misjudgment."

But that raises the question: are shares really that discounted?

"I am speculating, but I would suspect that a lot of people earning a million dollars after taxes may well invest 900,000 and still have 100,000 to spend on consumption."

Those largely aren't "workers". Most people *earning* that much money are collecting economic rents.

Aleecia wrote, "...the stock market generally has returns of 10% per year...even if everyone did realize a 10% gain, the increase would be more than wiped out by the overhead of managing millions of individual accounts..."

That's not the only thing. First, the 10% gain is the nominal gain; the real annual average gain is more like 7%.

Second, that average gain consists of three components:
* Increases in corporate earnings;
* the initial payout to stockholders (dividends, or we can pretend earnings are a payout), as a yield; and,
* the change in the P/E ratio.

In the long run, the P/E ratio can't go up forever. Thus, the long-term return of the market is determined by the first two factors. The problem is that, if we assume a level playing field and use the same GDP growth projections applied to estimations of the future trend for Social Security under the current system, plus the fact that corporate income can't really grow faster than GDP, then that first factor is limited to something like 1.5% over the next 75 years (at least in the out years). For the second factor, note that both P/E and P/D (price-to-dividends) ratios are pretty high right now.

Peter Diamond has written technical papers about this. Dean Baker has pointed out the inconsistency of those advocating privatization (who accept the Social Security projections yet bandy about the 7% real return for stocks figure without taking into account the issue of GDP growth). William Bernstein of efficientfrontier.com has written many excellent essays about stock returns over the long run and a few about social security.

Looking through the jm/Robert Brown exchange, I think we may be on the wrong track. I don't have the data on this, but isn't the conventional wisdom (conventional among those a level above the average MBA in their understanding of flow of funds) that the equity market is not a net source of funds for corporations? There is a one-time or sometime lift in a firm's capital from issuing shares, CFOs have greater flexibility in financing if both debt and equity are avaliable, but in the end, it is internally generated cash and borrowing that are net sources of funds to corporations. Thus arguing that forced savings will result in new investment seems off the mark. It is also not necessarily the case that households will be forced to put private SS funds into equities. Beyond that, the evidence for 401k and IRA experiments is that new savings vehicles shift savings, but do not necessarily increase savings.

Which is a long way of saying that we have good reason to doubt that forced private savings through the SS system will have any significant impact on the overall savings rate, the national debt/equity ratio, household holdings of debt, equity or savings. Certainly, the plan may have an impact on the public sector savings rate, and does not seem designed to improve that rate, so we may find that corporations are disadvantaged, overall, in their ability to raise capital.

Since the Bush plan, as I understand it, does not even increase forced savings, I don't know why we should think the secondary effect would be to increase savings, when earlier plans which actually improve the after tax return to savings had no such impact. Since the Bush plan, as I understand it, does not require equities to be purchased, I don't know why we think there will be big changes in holdings of, or returns to, equities. Since (as I understand it) equities are not a net source of funds to corporations now, I don't know why we should think that equities will become a net source of funds.

Liberal,

***”So what? *The transaction itself does not represent any new investment in the economy*. You have no idea what the seller of the share is going to do with the money. Before the exchange, A has $M and B has N shares of stock. After the exchange, A has N shares of stock, and B has $M. Nothing whatsoever can be inferred from the this exchange on the net impact on investment. It's true that B has $M more to make a "true investment". It's also true that A has $M less.”***

We appear to be talking past each other here a bit.

A has indeed transferred $M of his earnings to B in exchange for her N shares of stock.. If B sold her stock in order to buy a car, say, then you are correct that there is no new investment in the economy: B simply spent A’s earnings on consumption instead of A. However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say). If B bought a newly issued corporate bond, then A’s $M did indeed result in new investment.

I don’t have any data, but I strongly suspect that most transactions in the financial markets are portfolio balancing transactions where the seller has decided to take more or less risk or has decided that her judgment about a particulate stock is not correct, rather than liquidating positions for consumption. If this is true then A’s $M joined the financial markets seeking the best investments. But, as you say, he can’t be “sure” of it.

****”But that raises the question: are shares really that discounted?”****

Um…that’s what investors do for a living. Try to determine if a stock is priced right based on the underlying corporation’s earnings and growth prospects going forward.

****”Those largely aren't "workers". Most people *earning* that much money are collecting economic rents.”****

Are professional athletes “workers”? They belong to a union and receive a salary for running up and down a playing field. Are corporate CEO’s “workers? They get a salary in exchange for their expertise in managing a corporation.

That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income.

Liberal,

***”So what? *The transaction itself does not represent any new investment in the economy*. You have no idea what the seller of the share is going to do with the money. Before the exchange, A has $M and B has N shares of stock. After the exchange, A has N shares of stock, and B has $M. Nothing whatsoever can be inferred from the this exchange on the net impact on investment. It's true that B has $M more to make a "true investment". It's also true that A has $M less.”***

We appear to be talking past each other here a bit.

A has indeed transferred $M of his earnings to B in exchange for her N shares of stock.. If B sold her stock in order to buy a car, say, then you are correct that there is no new investment in the economy: B simply spent A’s earnings on consumption instead of A. However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say). If B bought a newly issued corporate bond, then A’s $M did indeed result in new investment.

I don’t have any data, but I strongly suspect that most transactions in the financial markets are portfolio balancing transactions where the seller has decided to take more or less risk or has decided that her judgment about a particulate stock is not correct, rather than liquidating positions for consumption. If this is true then A’s $M joined the financial markets seeking the best investments. But, as you say, he can’t be “sure” of it.

****”But that raises the question: are shares really that discounted?”****

Um…that’s what investors do for a living. Try to determine if a stock is priced right based on the underlying corporation’s earnings and growth prospects going forward.

****”Those largely aren't "workers". Most people *earning* that much money are collecting economic rents.”****

Are professional athletes “workers”? They belong to a union and receive a salary for running up and down a playing field. Are corporate CEO’s “workers? They get a salary in exchange for their expertise in managing a corporation.

That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income.

Liberal,

***”So what? *The transaction itself does not represent any new investment in the economy*. You have no idea what the seller of the share is going to do with the money. Before the exchange, A has $M and B has N shares of stock. After the exchange, A has N shares of stock, and B has $M. Nothing whatsoever can be inferred from the this exchange on the net impact on investment. It's true that B has $M more to make a "true investment". It's also true that A has $M less.”***

We appear to be talking past each other here a bit.

A has indeed transferred $M of his earnings to B in exchange for her N shares of stock.. If B sold her stock in order to buy a car, say, then you are correct that there is no new investment in the economy: B simply spent A’s earnings on consumption instead of A. However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say). If B bought a newly issued corporate bond, then A’s $M did indeed result in new investment.

I don’t have any data, but I strongly suspect that most transactions in the financial markets are portfolio balancing transactions where the seller has decided to take more or less risk or has decided that her judgment about a particulate stock is not correct, rather than liquidating positions for consumption. If this is true then A’s $M joined the financial markets seeking the best investments. But, as you say, he can’t be “sure” of it.

****”But that raises the question: are shares really that discounted?”****

Um…that’s what investors do for a living. Try to determine if a stock is priced right based on the underlying corporation’s earnings and growth prospects going forward.

****”Those largely aren't "workers". Most people *earning* that much money are collecting economic rents.”****

Are professional athletes “workers”? They belong to a union and receive a salary for running up and down a playing field. Are corporate CEO’s “workers? They get a salary in exchange for their expertise in managing a corporation.

That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income.

Sheesh,

Pardon me for the multiple posts.

Robert Brown wrote,

"However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say)."

It's "likely"? We have no idea whether it's likely, and you've presented no data whatsoever that such exchanges are preludes to true investment.

"Are corporate CEO’s 'workers'? They get a salary in exchange for their expertise in managing a corporation."

I disagree. What expertise? CEO's make a lot of money regardless of how their corporations do. Remember the idiots running Time-Warner, who decided to merge with a laughably overvalued AOL? I can't even imagine how negative their salaries would have to be to compensate their shareholders for their idiocy. And CEOs don't sell their labor in an even remotely competitive market. Much, even most, of their earnings are economic rent. Gretchen Morgenson of the _New York Times_ has written extensively on these topics.

"That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income."

Depends on how many such people there are. You presented no evidence that there are many. Postulating a class of buyers of last resort is too easy an out.

Robert Brown wrote,

"However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say)."

It's "likely"? We have no idea whether it's likely, and you've presented no data whatsoever that such exchanges are preludes to true investment.

"Are corporate CEO’s 'workers'? They get a salary in exchange for their expertise in managing a corporation."

I disagree. What expertise? CEO's make a lot of money regardless of how their corporations do. Remember the idiots running Time-Warner, who decided to merge with a laughably overvalued AOL? I can't even imagine how negative their salaries would have to be to compensate their shareholders for their idiocy. And CEOs don't sell their labor in an even remotely competitive market. Much, even most, of their earnings are economic rent. Gretchen Morgenson of the _New York Times_ has written extensively on these topics.

"That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income."

Depends on how many such people there are. You presented no evidence that there are many. Postulating a class of buyers of last resort is too easy an out.

Robert Brown wrote,

"Pardon me for the multiple posts."

Sheesh. Can't you get ANYTHING right? It's not your fault; rather, this blogging software blows.

Robert Brown wrote,

"Pardon me for the multiple posts."

Sheesh. Can't you get ANYTHING right? It's not your fault; rather, this blogging software blows.

Robert Brown wrote,

"However, since B is an investor, it is likely that she may have sold her
stock simply to diversify her portfolio (buy a bond instead of stock, say)."

It's "likely"? We have no idea whether it's likely, and you've presented no
data whatsoever that such exchanges are preludes to true investment.

"Are corporate CEO's 'workers'? They get a salary in exchange for their
expertise in managing a corporation."

I disagree. What expertise? CEO's make a lot of money regardless of how
their corporations do. Remember the idiots running Time-Warner, who decided
to merge with a laughably overvalued AOL? I can't even imagine how negative
their salaries would have to be to compensate their shareholders for their
idiocy. And CEOs don't sell their labor in an even remotely competitive
market. Much, even most, of their earnings are economic rent. Gretchen
Morgenson of the _New York Times_ has written extensively on these topics.

"That said, my original point was that retirees could sell their investments
to high income people, regardless of how they received their income."

Depends on how many such people there are. You presented no evidence that
there are many. Postulating a class of buyers of last resort is too easy an
out.

PS You had a post that has since disappeared, apologizing for repeated posts. I think there's one thing we can agree on---this blogging software s*cks.

Robert Brown wrote,

"However, since B is an investor, it is likely that she may have sold her stock simply to diversify her portfolio (buy a bond instead of stock, say)."

It's "likely"? We have no idea whether it's likely, and you've presented no data whatsoever that such exchanges are preludes to true investment.

"Are corporate CEO's 'workers'? They get a salary in exchange for their expertise in managing a corporation."

I disagree. What expertise? CEO's make a lot of money regardless of how their corporations do. Remember the idiots running Time-Warner, who decided to merge with a laughably overvalued AOL? I can't even imagine how negative their salaries would have to be to compensate their shareholders for their idiocy. And CEOs don't sell their labor in an even remotely competitive
market. Much, even most, of their earnings are economic rent. Gretchen Morgenson of the _New York Times_ has written extensively on these topics.

"That said, my original point was that retirees could sell their investments to high income people, regardless of how they received their income."

Depends on how many such people there are. You presented no evidence that there are many. Postulating a class of buyers of last resort is too easy an out.

PS You had a post that has since disappeared, apologizing for repeated posts. I think there's one thing we can agree on---this blogging software s*cks.

"Regardless of how we try to arrange the finance of our retirements, the underlying reality is that the goods and services to be consumed by future retirees must be produced in the future. We cannot stock them up. Therefore, the average standard of living that retirees will enjoy in the future will be determined entirely by how many workers there are per retiree, how productive those workers are, and whether what they produce can be consumed domestically (or has to be exported to pay off debts owed to foreigners, or as profit taken by foreigners who have bought up US assets). "

But the Social Security system itself affects all those variables. It affects the number of kids a family has, by taking 15% of everyone's wages and guaranteeing a retirement income. It affects the number of retirees, since workers depending on their own savings wouldn't necessarily opt to retire at 65. And as for productivity, we index benefits to wages which means that under Social Security, the faster younger workers get ahead, the more lavish a lifestyle they must fund for the elders - they can't grow their way out of it, the way they could if benefits were indexed to prices. Also, that 15% could have gone to investment (and much would have, if people had to fund their own retirements), which would mean additional capital, which would mean higher productivity down the road.

Liberal,

****"It's "likely"? We have no idea whether it's likely, and you've presented no data whatsoever that such exchanges are preludes to true investment."****

Let me take one more swing at this.

I think of the financial markets as a large pool of capital that investors are constantly trading among themselves as they seek to maximize their returns commesurate with their risk tolerance. There is a constant flow of new cash into the pool as invetors buy equities or bonds with their wages. There is also a constant flow of cash out of the pool as investors decide to spend their investments or put some cash in the mattress for a while.

Corporations take cash from the pool as they issue new shares of stock or new bonds. They return cash to the pool as they become profitable and use their earnings to pay off debt or buy back shares of their stock.

I maintain that as soon as A puts his $M in the pool he has contributed to new investment since his cash has enlarged the pool and his money is fungible so it is not really necessary to trace his dollars to a particular corporation.

****"I disagree. What expertise? CEO's make a lot of money regardless of how their corporations do."****

We can argue about whether CEO are over paid for what they do, but thats a different topic. They are still workers in that they receive cash for their labor. The Yankees are probably questioning if their epensive ball players are earning their keep as well, but they are still workers.

****"Depends on how many such people there are. You presented no evidence that there are many. Postulating a class of buyers of last resort is too easy an out."****

The context of my original post was that in a fully privatized SS system, seniors would not be limited to selling their investments to U.S. workers earning below $80,000, investing 12% of their salary. But, could be able to sell them to anyone in the world including upper middle to very weathly individuals who might well invest more that 12% of their earnings.

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