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December 07, 2004

Framing the Social Security Debate

Dan Froomkin watches the White House lapse into incoherence on Social Security:

Framing the Social Security Debate (washingtonpost.com): Initial signs suggest that the White House's campaign to add private accounts to Social Security will hinge on getting the public to embrace two bold but disputable assertions. One of those assertions is that the estimated $1 trillion to $2 trillion in new government spending required to create these private accounts is in fact not a cost but a savings.

Don't try that at home.

The other is that the Social Security system is in crisis -- $10 trillion short -- and that private accounts alone will entirely resolve the problem.

But the crisis is not imminent.... Even some who support partial privatization say increased taxes or reductions in guaranteed benefits still may be needed to put the federal retirement program back in kilter.

Press Secretary Scott McClellan was the public face of the White House's first major Social Security salvo yesterday.... Yesterday's press briefing is worth a look.

McClellan's message of the day: "There will be some up-front transition financing that will be needed to move toward a better system that will allow younger workers to invest a small portion of their own money into personal savings accounts. But it will be a savings over the current system. The current system is simply unsustainable."

Without using the word himself, he acknowledged that borrowing is "what you're looking at doing as part of the transition to a better Social Security system."

And four times, McClellan asserted that "The cost is $10 trillion if we do nothing."

Here's an excerpt:

"Q So the principle is that at least some of the transition costs will be financed --

"MR. McCLELLAN: We keep talking about cost. It's a savings, because the cost is $10 trillion of doing nothing, and this will actually be a savings from that cost of doing nothing.

"Q The borrowed money will have to be paid back. It's not imaginary, right?

"MR. McCLELLAN: And it will be a savings over the overall costs under the current system.

"Q That's your belief, but for now, the money will be borrowed and will have to be paid back.

"MR. McCLELLAN: It will be a savings over the long-term.

"Q What about the short-term, right now --

"Q And what is the basis for $10 trillion?

"MR. McCLELLAN: Bob has the floor. April, you've had your question, Mark, you've had your question. Bob, it's your question. I'll come back to you if I can."

Posted by DeLong at December 7, 2004 12:08 PM

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U.S. deficits fine -- Nobel laureate

"The U.S. (current) account deficit, no problem. People that say there is (a problem) are ignorant, they do not understand something called balance sheet, present value, something that a good undergraduate (economics student) learns," Prescott said.


Posted by: Winslow R. at December 7, 2004 12:29 PM

I posted this at Max's place but it goes well here too...

So the Bush Administration wants to take out a loan of $2T today to cover a possible $10T underfunding of Social Security in the future (75 year horizon). But they want to use that to cover current retiree payments so they can divert current working contributions to private accounts.

But if they used that same $2T and issued T-Bills (about 4.3% today for 10 year, lets say 4.5% for reissued 30 year) to the SS Trust fund, (yes I know this is silly but it's silly using the administration's accounting rules as well) when social security starts be under funded in 2042 (38 years hence) that investment will be worth.....

quick excel spreadsheet:

FV( 4.5%, 38years, 0 additional payments, $2T current value, 0)=

$10.65T ! yes! there's our $10T way before we really need it, maybe gramps could use a Lexus in his retirement. Oh, that's me, yes I damn well could use a Lexus.

T-Bills are wonderful things, no wondor the Chinese are buying so many.

Posted by: Steve Holmes at December 7, 2004 03:05 PM

I finally figured it out. Whoever is crunching the numbers for the Bush administration is using a calculator with no "minus" key. Deficit + tax cuts = balanced budget. SS shortfall + diversion to private account + "administrative fees" = savings.

BTW, the advocates of SS privatization seem to assume that Individual Retirement Accounts don't exist or will be abolished. It's perfectly legal to save for your own retirement.

Posted by: lightning at December 8, 2004 01:49 AM

You can't issue 2T into the bond market at 4.5% you n00b.

Posted by: Jeremy at December 8, 2004 10:33 PM

I'm just a humble humanist, so I'd appreciate it if folks who can do math would explain something to me. Won't the fees on private accounts be an annual income stream for Wall Street types? If it is, and the government is creating it, wouldn't the "market solution" be to auction the right to have access to the income stream. And shouldn't the whole thing be structured so that the winning bid(s) cover the transition costs? They made me read Milton Friedman a very long time ago when I was getting a liberal arts education and as I dimly recall, this is how a capitalist would solve the problem.

Posted by: Pudentilla at December 9, 2004 06:37 AM

Good God, Pudentilla, who told you they were capitalists? Good idea, though. We'd have a problem with collusion, though, because there are probably too few bidders. Think of Halliburton and Iraq.

Posted by: kharris at December 9, 2004 03:08 PM

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