November 19, 2004

Why Oh Why Are We Ruled by These Morons? (Social Security "Reform" Department

Jackie Calmes of the Wall Street Journal reports:

WSJ.com - After Fallujah, Election Worries Grow: SOCIAL SECURITY FIRST: Tax reform will follow in 2006. Bush advisers say the timing reflects that the president has no tax plan yet; he is to name a bipartisan advisory panel by year's end. "If the president doesn't know what he's going to do with tax reform after all this time, how's a commission going to help him?" asks Reagan economist Bruce Bartlett.

Allies doubt Bush can win both huge initiatives, and wonder if Treasury Secretary Snow is up to taking the lead. On Social Security, Congress' Republican leaders tell Bush he'll have to offer more details and take bigger role than he has in past. But advisers say Bush won't spell out how to cover transition costs for new private accounts....

"Won't spell out how to cover transition costs for new private accounts." I presume this means that the budget deficit is going to leap upward again?

Posted by DeLong at November 19, 2004 06:50 AM | TrackBack
Comments

"Bush won't spell out how to cover transition costs for new private accounts..."

For the umpteenth time, there ARE NO TRANSITION costs for private accounts.

There are the costs of paying the benefits promised to millions of Americans who will soon be retiring. That is true whether or not we move to a private or semi-private system.

Posted by: Patrick R. Sullivan at November 19, 2004 06:56 AM

He has no plan? Hey, I've got a plan. Put me in there!

Maybe "Is there a plan?" is the wrong question.

Ask "Is there a conspiracy to destroy the power of the Federal Government?", and see what the response is?


Posted by: John Thullen at November 19, 2004 06:57 AM

http://www.fareedzakaria.com/articles/newsweek/112204.html

"The political problem in Iraq, I have long argued, is the lack of a Sunni strategy. The United States has had a Shia strategy for Iraq's majority, and a Kurdish strategy for that group. But to the extent it had a Sunni strategy, it was to demolish all structures of power that Sunnis dominated—the Army, police, bureaucracy—and speak of the inevitability of Shia rule. 'The Sunnis will have to accept the new rules,' an administration official once told me. Well, they didn't. Without a political strategy to deal with them, the best military tactics will not work."

Posted by: glory at November 19, 2004 07:33 AM

There's a difference between trillions of dollars of future commitments showing in an actuarial document somewhere and trillions of dollars of additional government debt actually floating around, in addition to the new $800bn that Dubya will be adding over the next two years and God knows how much after that. And then after this, there's the question of the most efficient way to meet those commitments, which is a tough burden for millions of private accounts with very small balances and large transactions costs to meet.

Posted by: P O'Neill at November 19, 2004 07:35 AM

Patrick R. Sullivan writes:
>
> For the umpteenth time, there ARE NO TRANSITION costs for
> private accounts.
>
> There are the costs of paying the benefits promised to
> millions of Americans who will soon be retiring. That is true
> whether or not we move to a private or semi-private system.

Thanks for clearing this up. As Sullivan rightly points out, there are no transition costs, rather there are simply the costs of paying promised benefits if we move from the current plan to a private or semi-private system. They aren't transition costs, they are the costs of moving to ta new system. Don't you see the difference?

Well, I gotta run; I'm off to give a lecture on the dormative properties of sleeping pills.

(More seriously, the reason why there are real transition costs is that our current model for paying current and near future retirees from current payroll tax receipts becomes completely untenable when you effectively reduce the payroll tax rate to fund the private or semi-private system. I suspect you just haven't had enough coffee this morning.)

Posted by: Jonathan King at November 19, 2004 07:47 AM

Transition costs ? That's just fuzzy math ...

Posted by: Richard Cownie at November 19, 2004 08:06 AM

Patrick R. Sullivan said:
"For the umpteenth time, there ARE NO TRANSITION costs for private accounts.

There are the costs of paying the benefits promised to millions of Americans who will soon be retiring. That is true whether or not we move to a private or semi-private system."

And I respond:
Let's start with the error of the second paragraph first - an implied error, which is that we cannot pay the benefits promised to millions of Americans who will soon be retiring. We can pay the benefits promised to millions of Americans who will soon be retiring. We estimate that the system can continue to pay through 2042, with a problem in 2012 that amounts to - if you'll accept the analogy - being the point at which we no longer live solely on interest but are eating our capital as well. Thus the imperitive to change NOW is not so strident. Doing nothing will not be felt by any presently retired, and (given the 38 year time frame) is unlikely to impact most of those retiring over the next decade. There is a cost, but it's not to the category you've described.

We find this unacceptable, though. So we intend to change - to transition - to something at least somewhat different. The goal is to continue payments well past 2042. However, all the proposed solutions have someone paying something - solutions which include cutting benefits (thus those presently retired and retiring still don't keep their benefits, just some of them) and increasing the burden on the working and cutting future benefits of those not yet retired. Each of these is a cost, and is a cost due to transition. The alleged goal is that individuals future benefits are supplemented by private accounts to recover those costs, but the change and administration of those private accounts will have costs as well.

Claiming no cost leaves me searching for the hidden, because there are certain cliches too true to ignore. TANSTAAFL, for one. Or, "If it looks too good to be true, it probably is."

No cost? Give me your plan, and I suspect we're going to find someone who takes it in the shorts. A claim that the costs are there but they're not transition costs?

"I don't think that word means what you think it means."

Posted by: Kirk Spencer at November 19, 2004 08:39 AM

>I suspect you just haven't had enough coffee this morning

err, you must not be familiar with Mr. Sullivan's body of work...

Posted by: a different chris at November 19, 2004 08:43 AM

We'll never get past the "why oh why" problem as long as there is a willingness to believe (in ALL CAPS) that you can ignore an increased fiscal demand in the amount of $1-$2 trillion over an extended period simply by insisting that the wrong name is being used to describe the shortfall. I'm not sure why a cost that persists through a period of transition should not be called a transition cost, but I'm am perfectly willing to accept some other name for it, as long as that name is not laden with spin and partisan code.

Posted by: kharris at November 19, 2004 08:45 AM

Maybe Sullivan is looking for a job as an economist in the Bush Admin.

His analysis is just as good as the Presidents.

Posted by: spencer at November 19, 2004 08:53 AM

a different chris writes:
> [I wrote]
> > I suspect you just haven't had enough coffee this morning
> >
> err, you must not be familiar with Mr. Sullivan's body of
> work...

Oh, but I am. :-) I'm just also a big supporter of large mugs of hot cofee with milk. Coffee cures all ills, and if more people spent more time drinking more coffee, they'd have less time to get all grumpy about the transitional costs of social security.

Posted by: Jonathan King at November 19, 2004 08:59 AM

Oh. There are only costs for setting up private Social Security accounts if we decide to pay promised benefits to the baby boom generation. If we let the baby boomers go wanting, there is no problem with affording private accounts. We don't have no transition costs nohow, unless those selfish hipsters who have been paying more than would be needed for Social Security for a generation ask for what is owed. I understand.

Posted by: anne at November 19, 2004 09:21 AM

I have a solution to this problem; if there are
many people who believe (apparently along with W)
that privatization doesn't create a $1T+ transition
cost, perhaps these people would all agree to
accept their share of SS benefits only from the
money that's been redirected to private accounts ?
And those of us in the reality-based community
will take our money from the share of SS taxes
which haven't been given to anyone else.

I estimate 20%-30% of suckers should suffice
(and depending on whether you believe the exit
polls or the vote tallies, there seem to
48%-51% out there :-)

Posted by: Richard Cownie at November 19, 2004 09:21 AM

I believe tax "reform" is being discussed merely because Bush needed some boilerplate for a second term "agenda"; the interest being expressed is totally insincere. The truth is that there is no real agenda to apply his "mandate" to; hanging onto power for another four years is the only agenda.

Presumably SS reform with deficit increase implies 1 Euro = $1.75

Posted by: Bob H at November 19, 2004 09:23 AM

While we're talking about Social Security, don't miss David Gergen's declaration of "grown-up Republicandom" on the Op-Ed page of today's NY Times. Apparently shocked by the Administration's boldness in claiming a mandate, Gergen sets aside his spin doctoring to speak clearly about the Bush goals:

Mr. Bush is the first conservative whose policies would gradually unwind major commitments like Social Security and progressive taxes.

Moral values or not, I'm pretty sure NO ONE voted to "gradually unwind" Social Security.

Posted by: Mike S. at November 19, 2004 09:37 AM

Bob, that's a scandalous notion! No agenda? If I were Dick Cheney, I'd be questioning your patriotism right this very minute. And besides, Bush still has rich buddies who want stuff.

Posted by: kharris at November 19, 2004 09:43 AM

I think I see where the Republicans are going with their political logic, but please correct me if my understanding is flawed--

Let's suppose that the current budget deficit is $400B. Suppose also that the Social Security inflows are $600B and the outflows are $450B giving a trust fund surplus of $150B. The Treasury borrows the $150B from the Trust fund and $250B from the public to cover the deficit.

Now with a new plan you collect $150B less in Social Security and mandate that this amount goes to private accounts. What's the result?

The deficit is still reported at $400B.
The Trust fund still pays out the $450B.
The Treasury now must borrow the $150B from the public that it once borrowed from Trust fund.

It is possible to claim from this accounting that there are no transition costs: we are just letting the people save the surplus in their own accounts.

We discussed this topic at length on a prior thread last week. I believe that we should leave the collection process in place, separate the Trust fund from the Federal government, then allow the Trust fund to invest in a broader selection of securities. This gives us the best of all worlds.

Posted by: Keith at November 19, 2004 09:50 AM

I will give Patrick the benefit of the doubt and accept that under common assumptions and looking at the next 75 years, the NPV of the "cost" for converting to private accounts is zero or even negative. That is, the near-term costs are offset by larger reductions in costs in the distant future. The issue, to summarize others' comments, is whether we can afford those near-term costs.

Businesses look at this issue all the time. My favorite answer from a CFO-type to a proposal that was incredibly profitable on paper, but required borrowing most of the value of the company up front, was "Are you nuts? No one in their right mind would loan us that kind of money!" Can we count on China and Japan not being in their right minds?

Posted by: Michael Cain at November 19, 2004 10:13 AM

KHarris

"There are, however, those who now suspect the Fed is a leading indicator on asset market price moves...oh, well."

What does this intriguing argument mean?

Posted by: anne at November 19, 2004 10:27 AM

Well, it could be that they're trying to fix the trade deficit the pathological way. Make it so that nobody would want to invest in the US, allow our people to take some of their mandatory savings and put it somewhere else, and volia! You've got yourself a spot in the Economist's Developing Economies page.

Posted by: psetzer at November 19, 2004 10:36 AM

"err, you must not be familiar with Mr. Sullivan's body of work..."

Posted by a different chris at November 19, 2004 08:43 AM

That's because I've been soooo energetic, shoveling it into my wheelbarrow and putting it on my roses. They looooove the rich rosefood that only Patrick can (how shall I say) 'output'.
Then, after I pitchfork some straw around the roses, Patrick's rosefood can't even be seen. And on the internet, smell doesn't travel well.


Posted by: Barry at November 19, 2004 10:39 AM

Anne,

Bubble, bubble, liquidity trouble.....

You know the argument - the Nasdaq bubble was fostered by the Fed, the real estate bubble is likewise being fostered by the Fed, Treasury rates are artificially low because of the Fed (or maybe its the Fed's Chinese and Japanese and Taiwanese and Korean counterparts). Asset prices are part of the transmission mechanism for monetary policy. Less volatile macroeconomic performance has not been accompanied by less volatile asset price performance, as you would expect in an "all else equal" world. When neither growth nor inflation reacts strongly to monetary policy, liquidity has to end up somewhere, and that somewhere is in the tranmission mechanism - asset prices. I'm don't know many people who doubt that Fed policy affects asset prices. I don't know how to tell whether Fed policy is responsible for recent bigger than normal swings in asset prices, but that is a claim we keep hearing.

Posted by: kharris at November 19, 2004 11:09 AM

KHarris

"When neither growth nor inflation reacts strongly to monetary policy, liquidity has to end up somewhere, and that somewhere is in the tranmission mechanism - asset prices."

Yes, I understand. The Fed began a tightening sequence in 1999 that quickly slowed the rise in the stock market. The S&P began to decline to small gains for the year, while the NASDAQ stayed at bubble levels but stopped rising. Then, the Fed began to inject liquidity in the economy to guard against any Year 2000 problem. The S&P and NASDAQ took off. As the Fed began to absorb liquidity in 2000, and rate increases were resumed, the S&P and NASDAQ began to retreat. The final Fed rate increase was the 50 basis point move of May 2000.

Interesting.

Posted by: anne at November 19, 2004 11:27 AM

http://www.nytimes.com/2004/11/19/business/19fda.html?

A long term research physician with the FDA tells Congress the FDA has given up protecting consumers against drug dangers. A Stanford physician tells Congress that Merck threatened his career because he found Vioxx was dangerous. Merck and the FDA will of course have none of this. Fifty to sixty thousand needless deaths from heart attacks? Oh well. Several times more in hearth attacks? Oh well.

Posted by: anne at November 19, 2004 12:13 PM

What!!! no free lunch!!! Oh God What about the tooth fairy? There is a tooth fairy isn't there? Please

Posted by: Big Al at November 19, 2004 12:23 PM

Alan Greenspan - 11/19/04

The question now confronting us is how large a current account deficit in the United States can be financed before resistance to acquiring new claims against U.S. residents leads to adjustment. Even considering heavy purchases by central banks of U.S. Treasury and agency issues, we see only limited indications that the large U.S. current account deficit is meeting financing resistance. Yet, net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace. Net debt service cost, though currently still modest, would eventually become burdensome. At some point, diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios.

Resistance to financing, however, is likely to emerge well before debt servicing becomes an issue, or before the economic return on assets invested in the United States or in dollars more generally starts to erode. Even if returns hold steady, a continued buildup of dollar assets increases concentration risk.

Posted by: anne at November 19, 2004 12:44 PM

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

Why the World Needs a Weaker Dollar
Stephen Roach (New York)

A $40 trillion world economy is dangerously out of balance and seriously in need of a fix. A decline in the dollar is not a cure-all for all that ails the world, but it should go a long way in sparking a sorely needed rebalancing. That adjustment may now be under way.

Global imbalances are a shared responsibility that requires a joint resolution. America is guilty of excess consumption, whereas the rest of the world suffers from under-consumption. Growth in US consumer demand averaged 4% annually (in real terms) over the 1995 to 2003 period, nearly double the 2.2% gains elsewhere in the industrial world.

America’s consumption binge has not been supported by internally-generated income growth. Instead, US consumers have borrowed against the future by squeezing saving to rock-bottom levels. The personal saving rate stood at just 0.2% of disposable personal income in September 2004 — down from 7.7% as recently as 1992. Moreover, large federal budget deficits have taken the government’s saving rate sharply into negative territory — pushing the overall national saving rate of consumers, businesses, and the government sector to historical lows.

America’s saving shortfall has major consequences for the rest of the world. Lacking in domestic saving, the US imports saving from abroad in order to fund the ongoing growth of its economy. And it must run massive current-account and trade deficits to attract such capital from overseas. The United States balance-of-payments deficit hit an annualized $665 billion in mid-2004, or a record 5.7% of GDP.

The flip-side of America’s consumption binge is an overhang of excess saving elsewhere in the world.

Posted by: anne at November 19, 2004 12:51 PM

Gee, all the usual suspects say I'm wrong, but a Nobel laureate says I'm right. Who to believe? Who to believe?

"To see the phoniness of 'transition costs'...consider the following thought experiment: As of January 1, 2000, the current Social Security system is repealed. To meet current commitments, every participant in the system will receive a government obligation equal to his or her actuarial share of the unfunded liability...The result would be a complete transition to a strictly private system, with every participant receiving what current law promises. Yet, aside from the cost of distributing the new obligations, the total funded and unfunded debt of the United States would not change by a dollar. There are no 'costs of transition.' The unfunded liability would simply have become funded."

--Milton Friedman, New York Times, January 11, 1999

Posted by: Patrick R. Sullivan at November 19, 2004 03:04 PM

Ahh! One of the best Friedman thought experiments ever! Let's imagine there is no transition. Look no transition costs!

Posted by: Rob at November 19, 2004 03:25 PM

Notice that as we wonder whether there is a real estate bubble, the Kmart takeover of Sears has everything to do with potentially undervalued real estate assets. Kmart was taken over from bankruptcy partly for the real estate. A large REIT bought a stake in Sears a few weeks ago largely for the real estate. And, Kmart bought Sears even after a run in the stock price knowing the real estate is a cushion.

Posted by: anne at November 19, 2004 03:52 PM

http://www.nytimes.com/2004/11/18/business/18strategy.html

The Architect Behind Kmart's Surprising Takeover of Sears
By ANDREW ROSS SORKIN and RIVA D. ATLAS

About 10 days ago, Edward S. Lampert placed a call to his newest hire, Aylwin B. Lewis, whom he had installed as the chief executive of Kmart only a week earlier.

Then he dropped a bombshell: he planned to buy Sears. 'Oh my God,' Mr. Lewis said he replied.

Mr. Lampert, known as Eddie, loves to surprise people. Indeed, he has made a career of it. Mr. Lampert, a 42-year-old hedge fund manager whose business idol is Warren E. Buffett, is the largest investor in Kmart, the chairman of its board and the architect of the bold takeover of Sears.

After a tottering Kmart filed for bankruptcy protection in January 2002, Mr. Lampert began buying its bonds, making a contrarian bet that if he could take control, he could turn the company around.

He also noticed something that most other investors did not: the value of Kmart's real estate might be worth more than the business itself.

So, for slightly less than $1 billion, his investment company bought control of Kmart, a stake now worth about $2.5 billion.

The Sears acquisition will be a gamble, but Mr. Lampert, who once worked at Goldman Sachs for one of Wall Street's greatest masters of risk, Robert E. Rubin, seems to love to roll the dice.

'I am comfortable with uncertainty,' he said yesterday with a sense of bring-it-on confidence during an interview in Midtown Manhattan.

Having slowed Kmart's sales decline and returned the company to profitability by overhauling management and selling stores, he has upped the ante with another high-stakes gamble, this time on Sears. But, as with Kmart, the value of Sears's real estate should provide a financial safety cushion should the combined company continue to lose ground to rival Wal-Mart.

Posted by: anne at November 19, 2004 03:56 PM

Refi'ed my mortgage with a 30-year today. Man am I glad. God knows where interest rates will go once the Reserve Bank of China decides that keeping the dollar peg ain't worth it if it means buying US assets with severe currency downside.

Posted by: Urinated State of America at November 19, 2004 04:45 PM

Is the social security trust fund invested in long term or short term bonds? That is, will it be wiped out by gradual (10% per year) inflation, or only by fast (10% per month) inflation?

Posted by: wkwillis at November 19, 2004 08:13 PM


It's pretty obvious that it's only being held until 2006 to make it an election issue.

They probably won't even get around to really voting on it in Congress until after the election.

Posted by: Jon H at November 19, 2004 11:10 PM

Patrick Sullivan, OK, I see where our difference is.

You, or at least Dr. Friedman, is describing as transition costs _solely_ those one-time costs required to change from method A to method B. I (and I assume the others that disparaged your remarks) am including all expenses associated with the change - not only the move, but the ongoing costs involved in the new method. I like analogies, I'll use another.

An individual is going to a new town to take a new job. For you, the cost of the move is only "moving expenses" - mileage, food, fuel, etc to get the individual and his goods to the new town. For me, the cost of the move is that PLUS the cost of the initiation of a new residence AND the costs of getting out of the old residence. These may net zero, but if I have to place a non-refundable deposit for the new and I have to pay for a professional cleaning at the old - and of course there are the hookup charges for utilities and services... For me, those are costs of the move - moving costs.

Even for Dr. Friedman's thought experiment there is far more than just "the cost of printing some paper." There is the cost of dismantling the existing structure. There is the cost of ensuring that no extra paper sneaks into the system. There is the cost of determinig the future value of all and getting it to them. These are non-trivial sums despite Dr. Friedman's offhand dismissal.

Yet I would point out that we aren't doing Dr. Friedman's procedure. Instead what is being tossed about consistently requires cuts in benefits relative to what it paid. Thus the cost of the change is even greater.

No, sorry, but there are no transition costs only if you define them narrowly enough AND if you conveniently gloss over the things that still fall within.

Posted by: Kirk Spencer at November 20, 2004 06:41 AM

Aaack, failed to carry the analogy sufficiently. In the example, all I used were one-time costs. To continue: Other costs of the move IN MY VIEW include the utilities and/or gasoline being more expensive. Perhaps instead of public transportation or being in walking distance of my previous employment I have to have my own vehicle with its attendant costs. These may be compensated by the new wage, but they are nonetheless costs resulting from my move.

I can see Mr. Sullivan's point that these are not transition costs, but only if he'll agree that this does NOT mean there are no significant costs for the new method. Can't have the cake after eating it.

Kirk

Posted by: Kirk Spencer at November 20, 2004 06:48 AM

"Let's imagine there is no transition. Look no transition costs!"

Wrong. Friedman says there are NO transition costs if we move to a completely private system of investment accounts. Beyond the trivial clerical costs, that is.

Kirk, it's really much simpler than you are trying to make it. We have promised--but, are not legally obligated--to pay benefits to people who are currently working and paying SS (and Medicare) taxes. Those benefits are based on a formula that ties them to the amount of taxes paid.

That is a cost that exists. Period. There is no TRANSITION COST that we would only incur if we ended the current system and started a new one.

We have to decide how to meet the already existing cost. Essentially by raising taxes or cutting back the promised benefits. It's a sunk cost, and should have no part in the decision to change to a private, or semi-private SS system.

Btw, those who decry "tax cuts for the rich" should favor moving to exactly the system Friedman described. Under his system the burden of paying the promised benefits would be transferred to income taxes. Meaning they would hit high income earners harder.

Much harder, as the bottom 50% of earners pay only about 4% of income taxes.

Posted by: Patrick R. Sullivan at November 20, 2004 10:09 AM

No Patrick, Friedman is pretending that what everyone refers to as transition costs are something else and transition cost are implementation. When people talk about the transition they are talking about people who are in retirement or close too it that are in the current system. They must be paid for and the transition is between them and the generation with private accounts. This has to be doen from another revenue source outside of SS funds. Friedman is trying to be super technical so as to mislead people.

Posted by: Rob at November 20, 2004 12:17 PM

Patrick Sullivan is correct. Yet reminds us of a real weakness in current energy policy.

Sincere there are no transition costs in moving to hydrogen-powered mass transportation, why haven't we? The energy required to move a car 10 feet remains the same regardless of source.

Posted by: Admiral Tirpitz at November 20, 2004 12:42 PM

Patrick,

I'm going to use your second item to explain why I do not trust your handwave on the first, which is the theme of this thread.

Quite simply, the belief about the bottom 50% paying only 4% is completely, provably, wrong. According to the internal revenue service's data (cite http://www.irs.gov/pub/irs-soi/02in02tl.xls ) the bottom 50% of income earners paid about 22% of the total individual income tax in 2002. I say about because the break is by AGI by the $10,000 interval, and the sum of $1 to $30,000 AGI is 52% of the total returns, and produce 22.3% (rounded) of the total tax liability (after credits, etc) for that year. (By the way and on the other side... AGIs of $200,000 plus - the infamous "big break" line of earlier tax changes - form just under 2% of the taxable returns. They do not provide 50%, or even 10%, of the total tax base. They instead have 6% of the total tax liability.) "Common wisdom" fails in the face of the actual numbers. It's wrong. But it's quoted and used as a hammer and justification for all sorts of ills.

Now, the fact that you use this erroneous value (and you've done it more than once) makes me question whether you have truly considered the costs of the change, or it's yet another case of just swallowing what others have said without validating the numbers.

Quite simply, it isn't "that simple". It is instead as simple as "closing a base", and the as cost neutral or even cost positive as the the "peace dividends" to which these base closings are associated. There are literally millions of dollars of labor and equipment and supplies that would have to be expended to make the change in a fashion that would be trusted by the majority of Americans. We don't trust the government to take only what they're supposed to and so require reams of documentation. Likewise we don't trust other people to give and take only what they're supposed to from the government and so require agents and processes to ensure the untrustworthy are not successful. And while the process of one is generally transferrable to another, it is not specifically so. There is an absolute cost in making it specifically so.

You do not want to call it cost of transition? Fine, then I shall call it startup and closing costs of the respective administrations. They exist and are non-trivial, and just because you put them in a different category does not make them go away.

By the way, I'm a radical. If I were to push something in the way of taxes, I'd push something extreme. I'd eliminate the individual income tax. I'd make the whole bill come from corporate/business income taxes. But that's a separate thread.

Posted by: Kirk Spencer at November 20, 2004 02:24 PM

"the bottom 50% of income earners paid about 22% of the total individual income tax in 2002."

I wasn't talking about individual income taxes. But even if the bottom 50% pay as much as 22% it still means that the burden of paying SS benefits disproportionately falls on the higher income earners. It has to in a progressive rate system such as ours. You don't need anything more than 4th grade arithmetic to see that.

"There are literally millions of dollars of labor and equipment and supplies that would have to be expended to make the change..."

Which is chickenfeed to 300 million Americans (about half of whom are employed).

I take it you no longer believe what you said in your first post:

"The goal is to continue payments well past 2042. However, all the proposed solutions have someone paying something - solutions which include cutting benefits (thus those presently retired and retiring still don't keep their benefits, just some of them) and increasing the burden on the working and cutting future benefits of those not yet retired. Each of these is a cost, and is a cost due to transition."

Progress.

Posted by: Patrick R. Sullivan at November 20, 2004 03:34 PM

"Won't spell out how to cover transition costs for new private accounts." I presume this means that the budget deficit is going to leap upward again?
~~~~~~

Won't spell out how to cover the transition cost for the *status quo*: $10 trillion, and rising each year.

I presume this means we plan to have the budget deficit leap up by a *huge* amount some years in the future, at the same time as we are planning an even huger deficit increase for Medicare -- instead of financing the gap today, when it is both smaller (due to the lack of all that compound interest) and more manageable (due to the lack of vast Medicare borrowing).

What a great plan!

Now, Milton Friedman may be universally recognized as a dumbass, but even he gets it right once in a while: The only extra "cost" SS faces in the future is that of paying for all the benefits it has promised that it today has no way to pay for. And that cost exists in the *status quo*.

To call this cost of the *status quo* a "transition cost" when others propose a way to close it -- how nifty an Orwellian use of language is that?

And to mock others who propose ways to close this funding gap while having *no idea or proposal whatsoever oneself* for how to do it, and deem this the *intellectually superior* approach -- how funny is that? ;-)

Of course, among sensible people the reasonable course is to compare the cost of reducing the funding gap via privatization to the cost of closing it via the necessary tax increases, benefit cuts and ensuing reduced returns to participants without privatization.

Which gets us back yet again to the old challenge for those who keep harping on the "transition cost" of privatization, which I have never seen a single one meet: Tell us how *you* will close the $10 trillion funding gap via increases in the deficit, tax hikes, and/or benefit cuts that will *not* be a "transition cost" in your plan.

Posted by: Jim Glass at November 20, 2004 03:49 PM

"Quite simply, the belief about the bottom 50% paying only 4% is completely, provably, wrong."

Really??

It's amazing how often the IRS makes this mistake itself in its own statistical summaries. And then folks like the CBO...
http://www.cbo.gov/showdoc.cfm?index=5324&sequence=0
... GAO, Brookings, etc. and so on, all do too without even checking!

"According to the internal revenue service's data (cite http://www.irs.gov/pub/irs-soi/02in02tl.xls ) the bottom 50% of income earners paid about 22% of the total individual income tax in 2002. I say about because the break is by AGI by the $10,000 interval, and the sum of $1 to $30,000 AGI is 52% of the total returns, and produce 22.3% (rounded) of the total tax liability."

You mean....

Total tax liability (column AG)...
All returns: $834.9 billion.
Returns AGI <$30k: $37.4 billion.

That?

My calculator says 37.4 / 834.9 = 4.47%. Your calculator says 22.3%?

"Now, the fact that you use this erroneous value (and you've done it more than once) makes me question whether you have truly considered ..."

Now, tut, tut. Considering who's right and who's wrong on those numbers, maybe you should reconsider who should be reconsidering ...?

Posted by: Jim Glass at November 20, 2004 04:05 PM

Fascinating. Since I used a spreadsheet (actually, using blank space on THAT spreadsheet) and _thought_ I checked it twice, I am completely uncertain how I erred. OK, it's 4 and a half percent - close enough - and I apologize. I shall go ponder the rest. I will note, however, that personal experience in changing government offices in control that was supposed to be cost neutral makes me extremely suspicious of the "it ain't gonna cost anything extra" claims. And as that cost was due to needing such minor crap as new forms and new letterheads and changed regulations to be published and a whole host of petty crap like that - and all that in a mere change of region to which that office belonged - I have to think that at least part of the cost will be, well, "transition".

But I will go ponder.

Posted by: Kirk Spencer at November 20, 2004 04:44 PM

"Friedman is pretending that what everyone refers to as transition costs are something else and transition cost are implementation."

*Everyone* doesn't refer to them as "transition costs". Friedman points out that those who use this spin, or have been spun into believing it, are torturing the plain rules of finance, accounting, and the English language.

He points out that making a payment on a liability that you have *already* incurred, which *reduces* it in an equal or greater amount, is not a "cost" in any coherent meaning of the word.

"They must be paid for and the transition is between them and the generation with private accounts. This has to be done from another revenue source outside of SS funds. Friedman is trying to be super technical so as to mislead people."

And this is just where the incoherence is injected to get the spin spinning.

You draw an arbitrary time line -- and money that must come in to fund benefits before that line is a "transition cost", but money that must be brought in immediately after somehow *isn't*. ;-)

As Prof Delong wrote not very long ago:

"benefits for those of us half a generation or more from retirement -- say, in their early 50s, or younger -- must be cut by proportionately more: 40 percent or so".
http://www.j-bradford-delong.net/movable_type/2004-2_archives/000520.html

You know, "in their early 50s" is not so young, and not so far away from retirement!

A 40% benefit cut?? Or a corresponding amount of money, as you put it, "from another revenue source outside of SS funds" ... if exactly *that* is a transition cost of privatization, then how can you possibly claim there is *no* transition cost implicit in the status quo??

It is there as a certainty of arithmetic -- the exact same thing.

So to say this "cost" is an *extra* cost of privatization that somehow doesn't exist in the status quo is purest sophistry. That's is what Friedman pointed out.

If you don't believe it, go out and tell some 50-year-olds that under the status quo they are going to have their benefits cut by 40%. See if they view that as a "cost"!

In fact, the status quoers' head-in-the-sand delaying of funding the SS funding gap increases its *real* cost in current value terms every year. And failing to use the higher returns available from market investments (not just stocks) compared to govt bonds does the same. To reduce the *real* cost one must do both -- fund the gap and start using market returns -- as soon as possinble.

So here's the same challenge yet again: How would *you* close the funding gap for everybody in their "early 50s" and younger -- *without* doing anything that you'd call a "transition cost" if a privatizer proposed it? And while protecting benefits at lower current value dollar cost than in any privatization plan?

Just tell us how. If you can, I'll be all for it!

Posted by: Jim Glass at November 20, 2004 05:22 PM

For the Friedman fans - the argument seems to
be that the "cost" is what we have to pay out,
and this doesn't change when we move to private
accounts, so "there's no transition cost".
Is that an accurate summary ? So far so good.
But during the transition we're pumping
money into private accounts while still paying
out full benefits, so we need extra funding.
So call it a "transition funding shortfall",
or if you view transferring government money
into private accounts as a "cost" (which doesn't
seem unreasonable) then "transition cost"
doesn't seem inaccurate. And yes, maybe you'll
get it back later through the magic of stocks
(though that magic has been a bit weak since
2000), but if you think that's the same thing
then how about lending me $1M tomorrow and I'll
pay you back in 2050 ? Or how about paying all
your taxes for 2004-2013 right now ?

Anyway, if we make modestly optimistic
assumptions about future growth of GDP and
productivity then it appears very probable
that SS is not broken at all. Medicare, on
the other hand ...

Posted by: Richard Cownie at November 20, 2004 08:28 PM

'...during the transition we're pumping
money into private accounts while still paying
out full benefits, so we need extra funding.
So call it a "transition funding shortfall",...'

And if we stay with the status quo, we also have "funding shortfall".

There is nothing in a move to private accounts that creates a new cost. Beyond a few pennies per capita of clerical expense.

This is really very simple folks.

Posted by: Patrick R. Sullivan at November 21, 2004 09:56 AM

There are real transition costs, even if you argue that slashing future benefits cuts future obligations.

For one, we'd be switching from a partially funded system to a partial fully funded + subsidized system. Bush's plan bears that cost two ways; first, by borrowing, and second, by cutting OASDI funds (and hench benefits) by about 30% over the next 75 years.

For another, there is a transition cost going to an "ownership model" rather than an "insurance model". To give people ownership of assets, you add a death benefit. If you take money out of the system in death benefits, it won't be there to pay the living 75 years from now, unless it is funded separately.

Most of the folks who argue there are no transition costs are in the "Double Santa Claus" fraternity - those who argue that it is fine to run deficits in order to pay for their priorities.

Some of those folks believe the risk adjusted returns of private accounts would everywhere and always beat the implicit return of treasuries; others are happy with the prospect of reducing future benefits. Some seem to really believe in a free lunch.

TANSTAAFL.

Posted by: Charlie at November 21, 2004 11:14 PM

Patrick R. Sullivan wrote, "Beyond a few pennies per capita of clerical expense."

That's your assessment of the administrative cost of private accounts? LOL!

Posted by: liberal at November 22, 2004 04:20 AM

Economic Assumptions under the Three Alternatives
http://www.ssa.gov/OACT/TR/TR04/V_economic.html#wp159107

Trust Fund Ratios under the Three Alternatives
http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp106217

Links to the HTML version of the 2004 Report
http://bruceweb.blogspot.com/2004/11/2004-report.html

Put up projections of US productivity that don't solve the Social Security "shortfall" and yet still support historic returns on equity and then I'll listen. What I see here is a bunch of numerically talented people that have swallowed the notion that US productivity is going to flat-line at 1.6%. Engage the numbers at the heart of the issue.

You are arguing the frosting details on a half-baked cake.

Posted by: Bruce Webb at November 22, 2004 04:49 AM