Meanwhile, as everyone discusses the actual diameter of this particular of tree, over at Angry Bear there is a pertinent comment as regards the forest.

"Legal Immigration as a Means for Addressing Soc. Sec. Solvency

I’m for free trade, outsourcing, and free mobility of factors of productions – especially labor – as many conservative and liberal economists are. Angry bear..... provides us with another reason to lower barriers to international labor mobility.....’Increases in legal immigration would provide a significant boost to Social Security. The size of the actuarial deficit would be reduced over 50 years by 10 percent if legal immigration increased 33 percent (an additional 264,000 immigrants a year)’ http://www.nfap.net/researchactivities/studies/SocialSecurityStudy2005.pdf"

http://angrybear.blogspot.com/

First, let me remind everyone that the markets are slipping - higher oil prices, the sliding dollar...starts to look like that self-perpetuating global warming scenario. Ugh. Concern over the "reality" of the Social Security Trust Fund may be fondly remembered as a luxury compared to the mess we could be headed for (finally, LaRouche's "economic mud-slide" made real.)

Aside from the problem of creating more debt with bastardizing SS to make "personal accounts" (which anyone can acquire anyway...) - after looking at all the arguments on the Krauthammer thread, I think a lot of us are talking at cross purposes and not really "disagreeing" as much as we think. Most of the people who say that the TF isn't "real" mean that the government isn't as easily pressed in practice to use the SSTF "special" (?) bonds for retirement purposes, not that it wouldn't be dishonest, destructive to lots of people, etc. They also reference the fact that it would be hard to raise the funds and pay off all the other debt as well (that debt perhaps deliberately increased by the government haters to force such troubles and triages.)

Well, the rest of us say: yes, we realize that, we are just hopeful that honest governance prevails and interprets the existence of "bonds" as we were told it would, and are pressing to ensure that the funds are spent as they were promised. We want you to assure us whose side you're on, whatever you think will actually happen. (And, I don't want to just take the word of those who say we have no legal recourse - it's at least worth the effort and instigated embarrasment to try.)

***Above all, if the excess and regressive FICA taxes aren't really being put into a reliable trust, then we must demand they they stop being collected, and tax money must come from ordinary income taxes and the like.***

Well, Bush is trying for compulsory private social security accounts as a stealth tax increase. But he won't be president forever. What about when Hilary is president. Would you object to compulsory private social security accounts then?
Speaking for myself, I like the idea of all the old codgers sitting around the crackerbarrel discussing stocks and trading their social security stock accounts (with essentially zero trading costs because it's a closed index fund) and providing a non manipulated index and price for the rest of us.
It makes all those retired day traders socially usefull. They can spend all their time allocating capital between the Russel 5000 companies by establishing a share price in their closed social security accounts, each trying to outguess the others.
Real traders can do bonds, currencies, and whatever of the stock market hasn't been bought by the social security index account.
Bush doesn't want this. He doesn't even want to steal the trust fund because as far as he's concerned, he already has. He's spent it, hasn't he? He's not going to propose a tax increase to pay it all back, is he? So from his point of view there's nothing left to steal.

March 10, 2005

America's Senior Moment
By Paul Krugman - New York Review of Books

The Coming Generational Storm: What You Need to Know About America's Economic Future
by Laurence J. Kotlikoff and Scott Burns

1.
Two Problems, Not One

America in 2030 will be 'a country whose collective population is older than that in Florida today.' It will be in 'desperate trouble' because the expense of caring for all those old people will cause a fiscal crisis. The nation will be plagued by 'political instability, unemployment, labor strikes, high and rising crime rates.' That's the picture painted in The Coming Generational Storm by Laurence Kotlikoff and Scott Burns, a book that has helped to feed a rising tide of demographic alarm.

But is that picture right? Yes and no. America does have an aging population, and a responsible government would take preparatory action while the baby boomers are still in the labor force. America also has very serious long-run fiscal problems. But these issues aren't nearly as closely linked as much of the discussion would lead you to believe. The view of demography as destiny is only a half-truth, and in some ways it's as damaging as a lie.

In this essay I'll try to set the record straight. Unfortunately, I can't do that by following Kotlikoff and Burns closely. Kotlikoff is a fine economist, one of the world's leading experts on long-run fiscal issues. His book with Burns is full of valuable information and sharp insights. Yet in their effort to grab the lay reader's attention, Kotlikoff and Burns do little to alert readers to the distinction between two quite different issues—an aging population and rising spending on health care. And their failure to make that distinction grossly distorts their discussion.

The demographic problem is, of course, real. It is, however, of manageable size—exaggerating the problem by confounding it with the problem of medical costs just gets in the way of dealing with it. The problem posed by rising medical costs, on the other hand, would be there even if the population weren't aging—and misrepresenting the problem as one of demography gets in the way of confronting it....

http://www.nybooks.com/articles/17771

America's Senior Moment
By Paul Krugman - New York Review of Books

http://www.nybooks.com/articles/17771

America's Senior Moment
By Paul Krugman - New York Review of Books

The best bet, suggested both by a look at the numbers and by basic economic theory, is that prospective returns in the form of dividends and capital gains on stocks are somewhat higher than those on bonds, but not much higher—and that the higher expected return on stocks is offset by higher risk. That's why prudent investors hold portfolios containing both stocks and bonds, and why borrowing to buy stocks—which is, to repeat, what Bush-style privatization boils down to—is a very bad idea.

Taking away the assumption that stocks will yield very high rates of return fatally undermines the arithmetic of privatization. Again, consider the analogy of borrowing and using the money to buy stocks: if those stocks end up yielding a lower rate of return than the interest rate on the loan, you've made yourself worse off. Even if your best guess is that the return on stocks will somewhat exceed the interest rate, you can't be sure of that, and you'll be in a lot of trouble if your guess proves wrong. Most privatizers assume, when selling their schemes, that stocks will yield about 7 percent a year on average after inflation, while the interest rate after inflation will be only 3 percent. If the equity premium —the spread between the average return on stocks and the average return on bonds—really were that large, borrowing to buy stocks wouldn't be a sure thing, but the odds would be strongly in favor of coming out ahead. But if the expected rate of return on stocks is only 5 percent or less, which many economists think is more reasonable, the chances that borrowing to buy stock will end up being a los-ing proposition are quite high—especially if one takes mutual fund fees into account....

There are problems with all the so called "fixes" for SS. Unfortunately, the climate in Washington is anti-intellectual, anti-science and ideology and political fealty seem to count more than logic and political horse trading. The political climate is just not present at the moment for a reasoned bipartisan approach to tweaking SS. It would be better to wait until the present administration has cleaned out their desks and hope that the next administration that comes in knows how to solve problems instead of throwing ideology at them.

Bakho. You are assuming that the present lot will allow a genuine election.

Speaking strictly for me, Walter--certainly not for Brad, whose position appears to be the opposite--I would object to "personal stock accounts" even if the Administration could reasonably be expected to be managed and developed rationally (which I doubt anyone sane believes to be the case in the current administration).

The objections are twofold: first, the Barro point that PGL often makes. I have stock investments, money market investments, savings bonds (the next default, one presumes), IRAs and 401(k)s. All of those are allocated and financed based in part on knowing that there will be $x,xxx per month in SocSec benefits coming in, so the rest of the money can be placed in riskier assets--capital protection is less important than investment opportunity because the SocSec capital is protected.

If the SocSec capital ceases to be protected, that's a $x,xxx per month annuity and a $x,xxx per month insurance policy (protecting spouse and children through college--the same thing that enabled Senator Lindsay Graham and I, to name two, to afford college) that need to be replaced. So some of that stock holding is going to be changed into less risky assets--increasing my costs, while cutting benefits. The overall portfolio becomes more risky and offers a lower expected return (due to increased costs).

Point 1B (possibly point three that I only now thought to mention): As people get older, stock investments, as a rule, become less appropriate--need for cash in particular, need to protect capital in general. The "plan" being presented--and the trial balloon floated in 1998, memory serving--assumed holding stock until retirement. This is poor portfolio management--especially if there is a "market adjustment" a few months before your actual retirement. (Insurance companies can cope with this because they have future premia coming in, and can raise rates to compensate for poor market returns--as they have done with doctors, creating the "malpractice crisis"--while still paying current claims. An individual's SocSec "personal account," while it may be treated as a pooled asset, is not once it needs to be annuitized.

The second point is more direct--straight out of the Dan Drezner One-Minute MBA. People have multiple opportunities now to invest in the stock market--both personally and through defined-contribution pension plans, IRAs, etc. Those who wish to do so and can afford to do so--including all of those who can attain the credit to buy on margin--are already in the market.

The additional people who would "enter the market" are precisely those for whom stocks are not currently an investment--i.e., those for whom the risk premium the market would charge exceeds their expected return. (You could borrow on credit cards at 24% for an expected 6% market return, but I know no one sane who would call that an investment.)

So the question is "Why would we want people who are more risky than the market can bear to be pari passu? How does this help either the market or the current investors? And, since the current system (per the Lockhart slides) pays proportionately higher to those who are least invested, how does it help them? They are exchanging a sinecure that does what it was supposed to for the opportunity to invest in a market that would not otherwise consider them a good risk.

We can see how the risk is managed for the government--everyone will be charged a 3.0% haircut, which is rather higher than most index and mutual funds charge (another cost lowering my return in scenario one). But what no one has yet presented is the Reward we are supposed to get from that.

The Dan Drezner One-Minute MBA: If they can't pitch it by telling the truth, it's a lie.

Something occurred to me last night when my wife and I were talking about the idea of the government electing to default on the t-notes in the SS trust...it occurred to me that the current SS setup is something of a pyramid scheme.

If the basic SS solvency requirement is that there always be more workers than retirees, doesn't that mandate a continual increase in our population to achieve?

If so, that is not a sustainable path in the long run...shouldn't we be trying to address this problem in any discussions of SS change/reform/support/etc.?

This is where I think privatization can begin to enter the equation. What if we look at this as a long-term (multi-generational) strategic plan wherein a second retirement plan is setup (call it private SS). Couldn't we build in a phased migration from traditional SS over to the private SS starting some time in the future without negatively impacting traditional SS in the near term?

Here's where I need you economists to validate or refute the accuracy of the assertion and the feasibility of this idea.

Of course any other commentary is valued too... :)

http://www.nytimes.com/2005/02/23/opinion/23wed1.html

Some Inheritance

As he stumps for Social Security privatization, President Bush always gets a big round of applause for promising that the money in a private account could be passed on to one's heirs.

If those happy clappers only knew the details.

Under the president's proposal, when you retired you would not be able to start spending the money in your private account until after you bought an annuity, a financial contract in which you hand over a lump-sum payment and, in return, get a monthly stream of income for life. The upside of buying such an annuity would be that you'd be protected against outliving all of your money. The downside is that even if you died immediately after retirement, the most your heirs would inherit would be the amount that remained in your private account after you had paid for the mandatory annuity. (If you lived longer, of course, you might well need to spend the remainder to supplement the annuity's low monthly payout. )

The idea of making the private accounts part of one's estate is particularly appealing to low- and middle-income earners, who may not have all that much to leave to their heirs under normal circumstances. But those are exactly the people who would have to use the largest share of their accounts to buy annuities. The government would require that annuities be large enough to keep recipients above the poverty line for life. The less you had to start with, the less you'd have left over after buying the mandatory annuity.

What if you died before you retired?

http://www.nytimes.com/2005/02/23/politics/23social.html?ei=5094&en=9fc1fd2c9ca9a83a&hp=&ex=1109221200&partner=homepage&pagewanted=all&position=

Appeal to Young on Pension Plan Gets the Attention of Their Elders
By ROBIN TONER

CHESTER, Pa. - Almost no one is a more outspoken advocate of President Bush's Social Security plan than Senator Rick Santorum, the third-ranking Republican in the Senate leadership, who is campaigning across his state this week, trying to get young people to focus on their retirement.

Mr. Santorum argued, again and again, that the debate over Mr. Bush's plan for private accounts was really about young people's futures, because their benefits were at risk and because Mr. Bush had repeatedly promised that he would make no changes affecting Americans over 55.

This is a key element of the Republican strategy, creating an energized and mobilized younger generation fighting for its piece of an ownership society.

But there is a problem with that approach: retirees and those near retirement, a legendary political force, refuse to be shut out of the debate. At Widener University in Chester on Tuesday afternoon, people over 50 occupied perhaps half the seats at a forum held by Mr. Santorum and asked many of the questions - most of them negative.

At one point, Mr. Santorum looked out at the raised hands and said somewhat plaintively: "I'm seeing a lot of older hands. I'm not seeing any younger hands."

And still they kept coming, the "older hands," with questions that were not really questions....

stuart -- you could switch over, but if you do it honestly, it is a very bad deal for one generation. think of it this way -- the initial generation of retirees got more out of the system than they put in, since they paid in relatively little and got some benefits (not as much as is often claimed, but still some).

to end the system, one generation has to pay for the preceding generation's retirement, but not get any benefits from the next generation. that is a bad deal for them.

in addition to paying for the preceding generation, they have to save for their own retirement, so they are paying say 10% of payroll in taxes to support "traditional social security" without expecting to get anything out of social security, and they are also setting aside say 10% of their income to "save" for their retirement -- no matter how you cut it, one generation gets a raw deal.

subsequent generations just have to save for their retirement, they don't have to pay the payroll taxes to suport the preceding generation's retirment through the social security system.

A sensible solution, in my view, is to keep social security, with some tweaks, as a source of basic retirement income security. The "insurance" aspect of social security is important -- particularly for those at the low end of the wage income distribution during their working life. But social security in the future won't be able to be quite as generous as it is now, so there needs to be more private savings too ...

Stuart: there is some confusion about this "Ponzi" scheme charge. No, SS is not inherently a Ponzi scheme (requiring more and more persons entering than started.) It is just like any other allocation from one group of taxpayers to a serviced application, for people or not as the case may be. Suppose it was fixing roads. Of course, if the weather got worse, taxes would have to be higher (ratio of expense to number of taxpayers.) But, there is no inherent climb of the needed money, it's just the changing ratio.

So, in the case of SS the ratio is indeed workers:retirees, and it is changing. BUT, there is not some inherent need over and above that for "more people" as in a true pyramid scheme - if the ratio stayed the same, the population could just as easily stay the same.

Note that this ratio is a fundamental production to consumption transfer that can't be mollified by playing games moving money and financial instruments around. (eg we can't all get richer from interest on our bank accounts - who would pay the interest on the borrowed money?) Having more kids to "lower the ratio" doesn't help either - they are an expense when young, and so the total "dependency ratio" doesn't get much better (think - each person "cancels himself out" per this consideration.) Growing the population is like drinking to cure a hangover.

In further support of Neil's point, consider Figure II.D5 from the 2004 Trustees report. OASDI expenses as a fraction of GDP are forecast to rise in the medium term, but very nearly stabilize over the long term. Small adjustments in the retirement ages over that long term would completely stabilize the cost as a fraction of national income.

The problem is that SS is dependent on a tax base that is forecast to be a steadily shrinking portion of national income (bad news for low earners -- they will not be receiving a proportionate share of future economic growth).

How long is it going to be before Moveable Type previews actually show the formating that will be in the final post? This is annoying...

To see why the notion that SS requires a perpetually growing population is false, let us remove from the equation, for a moment, the issue of rising life-expectancies.

If life-span, birth-rate, and the rate of "early" deaths were all fixed, and birth-rate was equal to death-rate, then we would have a fixed population and a fixed distribution of ages over time. We could draw a "retirement age" such that the percentage of the population receiving population was in any proportion we chose, relative to the working portion.

Returning to reality: The problem is not that the population is not growing fast enough. The problem is that the "old" section of the population is growing faster than the "young" section, because people are living longer, and not as many of them are dying before they "get old".

This may or may not be a problem -- because of productivity gains, we're actually able to support more old people anyways. See Bruce Webb's figures on this issue. But even if it is a problem, means-testing and small adjustments to the retirement age solve it.

s/receiving payments/receiving population/;

Gah. I give up, I can't even write my correction correctly.

I wonder how much of this is a tempest in a teapot? If you have not saved enough on your own, then you will not be able to retire until later in life. This will spread the load on SS over a longer period of time.

brads, Niel, Michael Cain, Auros - Thank you very much. I figured it couldn't be that simple, and ill advised, to occur as I theorized. I did fear I'd thought up an excellent argument in favor of privatization though. The point about the generation that makes the leap away paying a huge price must really stick in an opponents craw. :)

I presumed there was some component of productivity that would skew things in favor of the retirees, I just lack the economics background/understanding to derive the answer myself.

I agree that the guaranteed benefit is the real value of SS...that, and the fact that the entire system functions like a self-supporting family (I care for my parents & grand parents, my children care for me and my parents, etc.).

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