Yes, they are back in the center ring:
AP Wire | 11/22/2004 | Bush Budget May Not Count Social Security: President Bush isn't likely to include costs for overhauling Social Security in the 2006 budget he presents to Congress in February, which some supporters say could hurt the White House drive to pass bipartisan legislation next year.
Chad Kolton, spokesman for the White House budget office, said Monday costs won't be budgeted until the White House settles on a specific plan to restructure Social Security that would let younger workers divert a third or more of their payroll taxes into personal investment accounts. Bush must present his budget to Congress in early February. "There's not a specific plan that the president has proposed," Kolton said. "When that is developed, that plan will dictate when we start to show those costs in the budget." There's little time to get behind a plan before Bush's budget is due in Congress.
Democrats opposing a Social Security overhaul and the White House's business allies have urged the White House to include costs in the new budget. Leaving it out, Democrats say, would mislead people by omitting the potential changes' effect on the budget. Supporters say including the costs in the budget proposal would be viewed as a strong sign the administration is committed to pushing through a bill next year and is reaching out to fiscal conservatives in a time of record budget deficits. The deficit hit $413 billion in 2004. "Do I think reform is still possible without it being in there? I do," said Derrick Max, executive director of the Alliance for Worker Retirement Security, a business-backed coalition supporting investment accounts. "But I think it becomes more difficult."
Including Social Security costs in the new budget "seems to us a wise thing to do in trying to move this forward with fiscally conservative Democrats," Max said. He noted that $400 billion for a Medicare prescription drugs plan was put in Bush's 2004 budget even though details had not been worked out. Because Social Security is a pay-as-you-go system, the government would have to make up the shortfall for current retirees' benefits should payroll taxes be diverted into private investment accounts. The transition costs range from $1.7 trillion to more than $2 trillion.
Sen. Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee, said he is "open to considering changes to Social Security because changes must be made," including adding personal investment accounts that have additional incentives for saving. "But these things have to be part of an overall budget framework. I'm not going to be supportive of something that explodes the deficits and the debt further," he said. Not including Bush's Social Security overhaul in the budget "kind of makes a farce of the budget process," Conrad said....
It gets even more bizarre:
washingtonpost.com: Republicans Finding Ways To Account For Overhaul: Judd Gregg (R-N.H.), the incoming chairman of the Senate Budget Committee, said concerns about the deficit should not be allowed to stand in the way of an overhaul that would put the ailing Social Security system on the path to solvency.... Gregg's thinking mirrors sentiments within the White House, according to administration officials and White House advisers. "The budget should reflect that this is an investment, a down payment that will have very positive implications," said White House spokesman Trent Duffy.
Within 20 years, the retiring baby-boom generation will begin earning more in Social Security benefits than workers are expected to be paying in taxes, a shortfall forecast to increase every year from then on. To ease the long-term shortage, the Bush administration wants to slow the growth in benefits but allow people to divert about a third of their share of Social Security taxes into personal retirement accounts.
In the years before the slower growth in benefits compensates for the loss in revenue, the government would have to borrow, raise other taxes, or cut other spending to maintain benefits for Social Security recipients. An analysis of one plan produced by Bush's Social Security Commission concluded that the interim financing would cost as much as $104.5 billion the first year, balloon to $194.4 billion in the 10th year and would peak in roughly 20 years at $258 billion. Any accounting mechanism that obscures or minimizes those costs is sure to be controversial. John M. Spratt Jr. (S.C.), the ranking Democrat on the House Budget Committee, called it "the budgetary equivalent of having your cake and eating it too." Social Security can be put on a stronger financial footing at a fraction of the cost of partial privatization, say critics, who note that borrowing hundreds of billions of dollars on top of already large deficits could spell fiscal disaster.
"We're entering the theater of the absurd, where you spend money, but it doesn't count, you borrow money, but you deny it," said Kent Conrad (N.D.), the ranking Democrat on the Senate Budget Committee. "Republicans are becoming further and further detached from reality."
To cope with the cost, while still helping the White House at least appear to be moving toward its goal of cutting the deficit in half by 2009, White House and congressional budget experts are looking at a variety of accounting mechanisms, said Michael Tanner, a Cato Institute Social Security expert who has worked closely with the White House. They include treating the cost of Social Security reform not as a present-day expenses, but more as a prepaid benefit for future retirees that should not be counted against current deficits. Or they may take the costs "off-budget," meaning Social Security spending would not be included in the calculation of the annual budget deficit.
"How they label it is going to be somewhat of an exercise in creative budgeting," Tanner said.
Gregg and other allies of the president argue, in fact, that transition costs of $1.5 trillion or more over the next 10 years should not be considered an increase in the nation's debt. Instead, they say, such borrowing would be a prudent recognition of future obligations.
"The diversion of a portion of payroll taxes to personal accounts is akin to prepaying a mortgage," R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers, wrote in the current issue of Business Week. "If the transition costs are borrowed, the resulting higher explicit federal debt in the near term is offset by lower implicit debt (Social Security obligations) in the longer run."
The U.S. government may already be borrowing more than $400 billion a year, but supporters argue that international lenders will not punish the Treasury for additional borrowing because they already have factored Social Security's future obligations into the interest rates of today.
"The market is rational, and they are already nervous about all these unfunded obligations in Social Security and Medicare," said Kent Smetters, a former Bush Treasury Department economist now at the University of Pennsylvania. "Resolution of that uncertainty is actually going to be a positive."
Now there are three things going on here:
1. Glenn Hubbard and Kent Smetters are talking about having the government write a large check to the Social Security Trust Fund to boost its current size and so bring the Social Security system into actuarial balance, and then having the government borrow the money to cover the check. That is a relabeling and a making explicit of current implicit federal liabilities, and such a topping-off of the Trust Fund *could* and *might* be carried off as Kent expects, without raising interest rates. (For example, if the Social Security Trust Fund then invests its enlarged balance in the very same Treasury securities the government issues to cover the check to the Trust Fund.)
2. Judd Gregg is talking about cutting current government revenues (by cutting Social Security taxes paid to the government), while (a) cutting far future Social Security benefits by enough to offset in the long run the cut in Social Security taxes and (b) cutting far future Social Security benefits again by enough to erase the current imbalance in Social Security funding. That's a very different thing: only if the recipients of the private accounts fail to regard their account balances as theirs and think of them as the government's is it possible to argue that Gregg's position is correct--but the major political reason the Republicans want to do private accounts is that the recipients will regard them as their own, and be happy as a result.
3. The Social Security system needs either big benefit cuts or large injections of additional resources. Private accounts are irrelevant to that big issue--even if you believe (as Kent Smetters apparently does not) that the market is far from perfect, and that there are huge risk-adjusted profits to be picked up by boosting the share of your portfolio invested in stocks (a view that I am in sympathy with).
Posted by DeLong at November 23, 2004 04:46 AM
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Brad, what kind of profits are available in stocks?
Assuming a 60% dividend-to-earnings ratio, and a stable 21:1 P/E ratio, the growth rate assumed by Social Security implies about 4.2% real long-term return in the stock market before any administrative costs. Say, then, 3.9% percent. This, compared to 3.0% in Treasuries.
Did you have something else in mind?
Posted by: David Rosnick at November 23, 2004 05:41 AMI read this in the WaPo this morning, and was gonna post here about it, but I see we're already on the case.
It's amazing, what a fantasy world these guys live in. Every time I think these bozos can't get worse, they do.
Posted by: RT at November 23, 2004 06:00 AMCan we all just run the public sector on "monopoly" money, 'cause none of this is real? My state government is facing a $700 million budget shortfall next year. Maybe our Republican governor will solve that by pretending it doesn't exist. Do you think the elderly poor in nursing homes will pretend to get Medicaid services? I know--all the children going to public schools can pretend to get educated by teachers who agree to pretend to get paid. See how it works? I wonder if the private sector organizations will accept any pretend payments. The Republican Congress will just have to instruct them to do so. Then everyone lives happily ever after.
Charles
Before widely read economists can advocate shifting social security revenues to private accounts to take advantage of "huge risk-adjusted profits," they should be forced to do it themselves. It's easy; you call your broker and tell him to short some treasury bills and go long the S&P. Then they can report back on how well they sleep at night.
The fact that nobody, not economists or wall street finance guys, will do this with their own money should tip you off that maybe this isn't such a sure winner.
Posted by: Adam at November 23, 2004 06:34 AMThe money in the private accounts will end up not in the hands of the "recipients", but rather in the hands of the Wall St. pros and other members of the power elite. For a preview, read the NYT article of a few days ago on the United Airlines pension fund.
Posted by: jm at November 23, 2004 06:36 AMWhile option 1 is at least intellectually serious, one has to wonder if right now -- with the dollar weakening and signs of increased overseas outflows from US financial markets -- is the right time to be looking to securitise all that debt that Smetters thinks the markets already knew about.
Posted by: P O'Neill at November 23, 2004 07:06 AMWhat worries me, intellectually that is, is there enough shares hanging about for all these people to buy, without raising the price and lowering the value.
Posted by: Old Ari at November 23, 2004 07:07 AMWell, if equities really do present a long-term bump of 1% in real return, maybe that compensates you for the increase in volatility and Brad is right. However, that's not really how I see it.
There are two issues.
One, examine what happens to the very large pools of retirement money already out there. Among the smartest among them are pensions like CalPERS. PERS works very hard for their beneficiaries, but in the end they have to index most of their capital -- they're just too big to do anything else. A national-scale retirement plan would have the same problem, multiplied by two orders of magnitude. California, after all, makes up only 10% of the US, and PERS represents the retirement savings of just a fraction of Californians.
So, a national plan becomes an index.
Two, what does the market do when the entire equity market finds a new, very large, risk-tolerant marginal purchaser? Well, heck, we know markets. Prices go up. What do higher prices mean for these new purchasers? Lower prospective returns. How much lower is a matter of speculation, but an efficient market should price away what the marginal buyer is willing to pay -- which in a perfect world, would exactly zero out the risk-adjusted advantage equity indexes have over treasuries.
The other issue, though I do not see this as a critique, is that a few years into such a plan the US government would effectively have nationalized its way to noticeable minority stakes in all publicly traded US businesses. Sure, those stakes would be held in "personal accounts" but that would be even more accounting fiction than the current trust fund.
As a crazy leftist, I wouldn't much mind for a well-run federal government to have a seat on every board of directors in the country. However, though I doubt George Bush wants that, that's where his plan is headed.
Just when you thought the command economy was dead, nationalization is back!
"The Social Security system needs either big benefit cuts or large injections of additional resources. "
It seems to me privatization does both. Instead of an open ended promise to keep monthly checks coming as long as the pensioner lives, the private retirement account is limited by what has been paid in. So that's a benefit cut right at the start. But, taking that moeny out of government hands (where it is spent on tanks and bombs and military things that are designed to destroy wealth) and putting into private investment (where the money is spent manufacturing and designing and providing useful services -- creating wealth) then the government should eventually see a bigger pie to cut itself a slice from.
The details of privatization are admittedly sticky. SO, why shouldn't the Democrats insist on the plan Daniel Patrick Monyhan bequeathed the nation some years back? Don't even let Bush have credit for it. The Monyhan plan. It even rhymes.
Posted by: pouncer at November 23, 2004 08:27 AM"Instead of an open ended promise to keep monthly checks coming as long as the pensioner lives, the private retirement account is limited by what has been paid in. "
Is it though? Won't the government have to maintain a safety net for those who outlive their nest eggs? Which ill in turn lead some to blow through their nest eggs faster?
Posted by: Randy at November 23, 2004 08:42 AMI guess these guys weren't kidding when they said they were creating a "new reality." Next thing you know, we'll be told that we don't have a current account defict. Yikes!
Posted by: nanute at November 23, 2004 08:55 AMWhy doesn't anybody ever suggest raising the retirement age? I mean, look at the facts:
* Sixty-five isn't all that old these days. Lots of people work til, say, 70.
* There will be fewer young people, so their elders can probably get some of those jobs, so there will be enough jobs.
If we increase the age by, say, two months every year, we'd have a ... well, a smaller problem, maybe.
Why is this such a third-rail issue?
Sincerely,
Much younger and saving all my pennies for a SSI-less retirement.
My understanding is that the current SS surplus is used to offset the deficit, netting to the numbers we see today. If SS is taken off-book, won't that create an immediate rise in the stated deficit?
Not a "real" issue to the extent that the $$ are the same, just in different accounts, but how do we expect the Admin to spin this? Or will they try to have it both ways (my guess).
Posted by: peBird at November 23, 2004 09:12 AMI wish *I* had the luxury of whenever I paid a transition cost - moving & relocation, liquidating assets that incur taxes, etc. - to just not "count" those costs toward my budget or total liabilities. It would certainly make life easier. What's the phrase again? "Does not conform to generally accepted accounting practices...".
Posted by: oldman at November 23, 2004 09:18 AM"The Social Security system needs either big benefit cuts or large injections of additional resources. Private accounts are irrelevant to that big issue..."
Progress!
Posted by: Patrick R. Sullivan at November 23, 2004 09:18 AMAs one of the few who earn more than $87K, I'm all in favor of eliminating the cap.
Posted by: Brian Boru at November 23, 2004 12:35 PMWell you need a limit, otherwise it won't pass.
Start modest, double it to a nice round 175K. That will help.
On the marketing side you can flog the fact that dollars are evading the payroll taxes.
Posted by: Nemesis at November 23, 2004 01:25 PMLet's try Calling it "Enron" accounting, or maybe "Corporate Welfare".
What does a company have to do to get the SS to buy their stock? With so much money going into the market, wouldn't SS end up owning a little bit of every company? Would such a plan have kept Arbusto Oil afloat a few extra months?
And yes, when we invade Iraq, they will greet us with flowers.
Posted by: JB at November 23, 2004 03:25 PMIf Senator Gregg is in favor of taking social security spending `off-budget', doesn't that mean they could no longer count the current social security and medicare surplus against the rest of the annual federal deficit? In that case, the 2004 deficit would probably be about $600 billion, rather than just over $400 billion.
Posted by: Sam3am at November 23, 2004 06:57 PMI don't want to wear out my welcome here, so I'll pose this as a puzzle for your amusement: What is the relation of the first column of Social Security years to the second? And what would be the implications?
1996 2030
1997 2030
1998 2032
1999 2034
2000 2038
2001 2039
2002 2041
2003 2042
2004 2042
Hint: we did nothing to fix Social Security over the period of the first column.
Is that the projected year the intermediate term model turns red? yes it's going up for 8 years but that has stalled recently...
I would think partially that increase in solvency has been through the decrease in the projected CPI which applies to benefit increases...
but ahh why have CPI "projections" been decreasing? or why was CPI overestimated in 1996...
I would say hedonic pricing of IT has played a some role in the deceleration of inflation (the exact amount I'm not sure)...I know the price of gas education, housing and medical costs keep rising but thanks to ever better computers my CPI has barely budged....
the flip side of that is some GDP "growth" is really just imputed from hedonic pricing and voila we have higher output and higher productivity......
so each of these forces have an upward bias on the assumptions that would make the program appear ever more solvent especially since hedonic pricing was applided to more goods over the 1996-2000 period...
However, just the act of not including more goods under hedonic pricing would make the current period less likely to have that type of downward bias affecting CPI numbers
I don't pretend to know the numbers that are generated by hedonic pricing but certainly if $ and oil continue their plunge over the next few years ud have to break down and raise ur CPI projections...that would probably start a cycle where the number on the right hand side would start to drop instead of rise....
from an anlaysis of 1998 trustee report:
The BLS action will reduce the CPI by 0.2 percentage points annually. Since Social Security benefits are adjusted each year by the CPI, the long-term Social Security projections are highly sensitive to projections concerning the CPI. Had the trustees been able to reflect the new CPI reduction in their projections, their projections would show a somewhat smaller long-term imbalance and show the system remaining solvent for a somewhat longer period.
Is that the projected year the intermediate term model turns red? yes it's going up for 8 years but that has stalled recently...
I would think partially that increase in solvency has been through the decrease in the projected CPI which applies to benefit increases...
but ahh why have CPI "projections" been decreasing? or why was CPI overestimated in 1996...
I would say hedonic pricing of IT has played a some role in the deceleration of inflation (the exact amount I'm not sure)...I know the price of gas education, housing and medical costs keep rising but thanks to ever better computers my CPI has barely budged....
the flip side of that is some GDP "growth" is really just imputed from hedonic pricing and voila we have higher output and higher productivity......
so each of these forces have an upward bias on the assumptions that would make the program appear ever more solvent especially since hedonic pricing was applided to more goods over the 1996-2000 period...
However, just the act of not including more goods under hedonic pricing would make the current period less likely to have that type of downward bias affecting CPI numbers
I don't pretend to know the numbers that are generated by hedonic pricing but certainly if $ and oil continue their plunge over the next few years ud have to break down and raise ur CPI projections...that would probably start a cycle where the number on the right hand side would start to drop instead of rise....
from an anlaysis of 1998 trustee report:
The BLS action will reduce the CPI by 0.2 percentage points annually. Since Social Security benefits are adjusted each year by the CPI, the long-term Social Security projections are highly sensitive to projections concerning the CPI. Had the trustees been able to reflect the new CPI reduction in their projections, their projections would show a somewhat smaller long-term imbalance and show the system remaining solvent for a somewhat longer period.
Is that the projected year the intermediate term model turns red? yes it's going up for 8 years but that has stalled recently...
I would think partially that increase in solvency has been through the decrease in the projected CPI which applies to benefit increases...
but ahh why have CPI "projections" been decreasing? or why was CPI overestimated in 1996...
I would say hedonic pricing of IT has played a some role in the deceleration of inflation (the exact amount I'm not sure)...I know the price of gas education, housing and medical costs keep rising but thanks to ever better computers my CPI has barely budged....
the flip side of that is some GDP "growth" is really just imputed from hedonic pricing and voila we have higher output and higher productivity......
so each of these forces have an upward bias on the assumptions that would make the program appear ever more solvent especially since hedonic pricing was applided to more goods over the 1996-2000 period...
However, just the act of not including more goods under hedonic pricing would make the current period less likely to have that type of downward bias affecting CPI numbers
I don't pretend to know the numbers that are generated by hedonic pricing but certainly if $ and oil continue their plunge over the next few years ud have to break down and raise ur CPI projections...that would probably start a cycle where the number on the right hand side would start to drop instead of rise....
from an anlaysis of 1998 trustee report:
The BLS action will reduce the CPI by 0.2 percentage points annually. Since Social Security benefits are adjusted each year by the CPI, the long-term Social Security projections are highly sensitive to projections concerning the CPI. Had the trustees been able to reflect the new CPI reduction in their projections, their projections would show a somewhat smaller long-term imbalance and show the system remaining solvent for a somewhat longer period.
Is that the projected year the intermediate term model turns red? yes it's going up for 8 years but that has stalled recently...
I would think partially that increase in solvency has been through the decrease in the projected CPI which applies to benefit increases...
but ahh why have CPI "projections" been decreasing? or why was CPI overestimated in 1996...
I would say hedonic pricing of IT has played a some role in the deceleration of inflation (the exact amount I'm not sure)...I know the price of gas education, housing and medical costs keep rising but thanks to ever better computers my CPI has barely budged....
the flip side of that is some GDP "growth" is really just imputed from hedonic pricing and voila we have higher output and higher productivity......
so each of these forces have an upward bias on the assumptions that would make the program appear ever more solvent especially since hedonic pricing was applided to more goods over the 1996-2000 period...
However, just the act of not including more goods under hedonic pricing would make the current period less likely to have that type of downward bias affecting CPI numbers
I don't pretend to know the numbers that are generated by hedonic pricing but certainly if $ and oil continue their plunge over the next few years ud have to break down and raise ur CPI projections...that would probably start a cycle where the number on the right hand side would start to drop instead of rise....
from an anlaysis of 1998 trustee report:
The BLS action will reduce the CPI by 0.2 percentage points annually. Since Social Security benefits are adjusted each year by the CPI, the long-term Social Security projections are highly sensitive to projections concerning the CPI. Had the trustees been able to reflect the new CPI reduction in their projections, their projections would show a somewhat smaller long-term imbalance and show the system remaining solvent for a somewhat longer period.
sorry about that 4 post - first timer :)
Posted by: John Nail at November 25, 2004 11:46 PMthe initial effect of the government simply borrowing the money and then handing that money to workers in their private accounts to have them buy...let's assume they can only buy US equites...(an aside: what a nightmare this will be just deciding what people can buy...can they short the $ in their accounts because that might actually generate the best return over the next several years?)
so they buy $100 billion of the SPY 500 then i guess those people then buy the $100 billion of T-bills issued to buy the stocks...obviously, it's not that neat but that really descibes the process...
In some ways u are pushing existing stockholders to become bondholders...what makes stockholders want to be bondholders...well make the stocks higher so they sell and bonds lower so the'll buy....that would be neat little short term effect...higher sotck prices AND higher interest rates...
Posted by: John Nail at November 25, 2004 11:58 PM