Brad DeLong has written a great little Statement on Social Security Reform.
Brad DeLong, Why Oh Why Are We Ruled by These Fools? (Yet Another Social Security Edition):
Ah. It becomes clearer and clearer why nobody in the administration who knew anything about Social Security substance was trotted out the week before last to provide details on Bush’s endorsement of Pozen’s “progressive price indexing.” The numbers are ugly.
Jason Furman has the details. And they are indeed ugly.
Today’s Krugman column on social security, The Final Insult, is a gem. A small taste:
But Mr. Bush isn’t calling for small sacrifices now. Instead, he’s calling for zero sacrifice now, but big benefit cuts decades from now - which is exactly what he says will happen if we do nothing. Let me repeat that: to avert the danger of future cuts in benefits, Mr. Bush wants us to commit now to, um, future cuts in benefits.
What columnist is more deserving of a Pulitzer?
Via Dan’s Not Exactly Must-See TV, this perfect quote from Michael Tackett in the Chicago Tribune:
President Bush on Thursday used a format he does not like to discuss issues he cannot resolve in hopes that he can sell the American people on policies most say they don’t want.
One of the oddest things about the Bush Social Security campaign — after the fact that they started it at all — is the constant repletion of the mantra that today’s elderly won’t have their benefits cut. That clangs every time I hear it.
Given the highly effective Democratic scare-mongering on this issue in past elections, one can see why the Bush crowd might think it needed to preempt this criticism. But to trumpet it in a manner which to my ear screams ‘everyone else gets the shaft’?
Needlenose noticed this too, but he has a good comeback which neatly ties the two elements together:
From the Department of Accidentally Opened Doors: The’ message to seniors should be: “Look how far George Bush and his party are from your values. They think you can be bought — that you’ll sell out your kids and grandkids as long as they don’t personally cut your benefits.”
The first section of my brother’s column today for WashingtonPost.com is a must-read on Social Security.
And there I was thinking he was just into the ‘I am a camera’ thing. But no, this is hard-hitting stuff.
Krugman explains the intellectual bankruptcy of the economics behind the most often heard case for privatization of social security. In Many Unhappy Returns Krugman shows that the economic assumptions required to generate the returns on stocks needed to earn the high returns predicted for private, personal, or whateveryoucallthem accounts require unrealistic assumptions.
And, alternately, if you believe our economy will have the kind of growth needed to earn the predicted returns, then there’s no Social Security crisis anyway, because that amazing economic growth fill fund any possible future long-run shortfall.
The Carpetbagger Report: Playing by White House rules, Bush is bankrupting the government: It’s always been a ridiculous claim, but using White House definitions, the system will be “bankrupt” when liabilities outnumber assets. Social Security, in other words, will be bankrupt — in Bush’s mind — because it may be unable to meet all of its obligations at some point down the road.
And, as the great Carpetbagger notes, if you define ‘bankruptcy’ as ‘cash flow out exceeds cash flow in’ or ‘cash flow flow out exceeds cash flow in plus assets on hand’ then the US government, GWB proprietor, is ‘bankrupt’.
TPM tries on understatement for size.
Talking Points Memo: by Joshua Micah Marshall: Is it troubling at all that this paragraph, the third in a piece tomorrow’s Post, appears to be the White House’s own description of how they’ll sell their Social Security phase-out plan?The campaign will use Bush’s campaign-honed techniques of mass repetition, never deviating from the script and using the politics of fear to build support — contending that a Social Security financial crisis is imminent when even Republican figures show it is decades away.Hmmm.
Even if you can’t fool all of the people all of the time, can you sucker a majority?
Via of all places the increasingly irrelevant Wonkette, this item from the Christian Science Monitor—One man’s retirement math: Social Security wins:
For 45 years, the defense-industry analyst paid into the system until his retirement in 1994. But with all the recent hoopla over reform, Mr. Logue, a Massachusetts Institute of Technology graduate, decided to go back and check his own records. Would he have done better investing his money than the bureaucrats at the Social Security Administration?
He recorded all the payroll taxes he paid into the system (including the matching amount from his employer), tracked down the return the Social Security Trust Fund earned for each of the 45 years, and then compared the result with what he would have gotten had he been able to invest the same amount of payroll tax money over the same period in the Dow Jones Industrial Average (including dividends).
To his surprise, the Social Security investment won out: $261,372 versus $255,499, a difference of $5,873.
Yes, it’s partly a timing phenomenon (but people who depend on retirement income are less able to time than others), and yes, “Advocates of privatization point out - correctly - that Logue’s analysis compares theoretical stock returns with what the Social Security Trust Fund earned - not what he himself would get from the system.” But not everyone has optimum earnings. And the transactions costs and fees of private plans are going to be much, much larger than what the efficient Social Security Administration (arguably the most efficient agency in the federal government) currently spends. Which is why Wall St. is salivating.
Indeed, as the Monitor points out, “The debate hinges considerably on what people want their retirement system to be. Social Security has always been an insurance program. It was never intended as an investment scheme.” And relying solely on private pensions means you inevitably get a cadre of very poor old people:
… under Britain’s privatized pension system, so many retirees are doing so poorly at this moment that a commission warned this fall that widespread poverty among the elderly may be returning, which could require massive new government spending.
Wouldn’t it be nice if we could get this sort of reasonable thinking into the mainstream.
Brad DeLong writes writes in favor of federal investment in equity markets in the context of various Social Security privatization proposals. After demolishing some really bad ideas, he says,
I would rather see this forced equity savings done not through private accounts but through allowing the Secretary of the Treasury to invest the Trust Fund in equities. I would rather see this done by the Treasury Secretary for three reasons: (1) if I’m wrong, then there’s no great harm, while there is great harm if you cut people’s benefits assuming expected stock returns will be high and they aren’t; (2) there’s still a lot of risk out there, and the government is better-positioned to bear that risk than individuals; (3) offer individuals the opportunity to do so and they will churn their investments, buying high and selling low. The only reason to use private accounts for this forced equity savings is the fear that having the Secretary of the Treasury control a lot of equities will magnify our corporate oversight and control problems, and I don’t see this is a first-order problem.
Although attractive in the abstract, the idea that the government might try to invest in equities and thus directly enjoy some of the fruits of the very capitalism it creates a safe environment for (rather than just benefitting indirectly via taxes) is, I think, much more fraught than the economic mind instinctively recognizes. While I’d be happy if we could make it work, I don’t think we are up to it in practice (and I’m certain the Bush administration is not up to it!): the problems that need surmounting are much worse than Brad suspects, and are much worse then just “magnify[ing] our corporate oversight and control problems,” although who votes the government’s shares and according to what policy is no small problem.
No, the first-order problem isn’t that having the feds control a lot of equities will magnify existing corporate oversight and control problems. It’s that the way in which the feds choose what to hold and sell will create huge new problems.
Start with the buying end. Buying will either be mechanistic, delegated, or discretionary. If it is mechanistic, we have the wrangle over the formula, which then distorts markets unless the formula is to buy a basket consisting of the entire stock market (even this, arguably, has secondary effects on the bond market, but let’s not go there).
In fact, this is the only buy/sell formula that doesn’t create huge problems right off: have the feds buy a basket that represents all the shares in a multiplicity of exchanges (not just the big ones). But this isn’t easy to do, especially for small-cap stocks, without distorting markets. Even here, though, a mechanistic sell policy may have some undesirable depressive effects at inconvenient times driven by demography. And while it’s arguable that similar selling would be happening anyway if the funds had been in private pension funds, that may be the wrong comparison, since the funds might otherwise come out of general tax revenue, and thus spread the effects beyond the stock market.
If the feds use any formula other than whole-market, it becomes very distortionary given the sums involved. For example, if the feds just buy the S&P 500, or even just a NYSE basket, the effect of being listed in that group or that one among competing exchanges (or, worse, de-listed) is substantially magnified because it comes with an investor who can be relied upon not to sell based on market shifts, and whose buying and selling generally is predictable. Not to mention that the biggest equity gains may well be in the stocks that are not in the S&P 500 or the NYSE (think, for example, NASDAC).
If buying is delegated to fund managers, they become incredibly powerful and lack the sort of checks on performance that would be needed since the government is highly unlikely to exit an under-performing fund. I suppose one could in theory create some performance-related pay for the managers that might substitute for market discipline, but there is no real chance that politics would allow the feds to create a performance pay scheme that would have the right sort of long-term incentives. (Again, imagine the Bush administration writing the rules here…)
If the feds themselves have any discretion as to what to buy, we’re in for even worse crony capitalism than we have now, with a dash of ‘lemon socialism’. Imagine if campaign contributions might, or even are thought to maybe, have a chance of turning the feds into a buyer of your shares. At this point, having the Bush administration in charge is just a nightmare. And imagine the pressure to have the government buy into ‘critical industries’ or key local employers to prop them up or protect them from foreign takeover. (It may be that the new TRIPS and GATT regimes protect against this somewhat; it’s been a very long time since I looked.) And try re-telling the Lockhead or Chrysler stories if the government has an equity buying scheme.
It’s even worse on the sell side. If the formula for selling shares is anything but mechanistic, then a government sell decision will be seen as a massive vote of no-confidence. [Side issue: can the government use its information about the economy to decide what to buy and sell? Or rather, what information is it allowed to use generally?]
Then there are the macro issues: just imagine the times when Congress and local pols will be pressing the feds to buy or sell as an aspect of counter-cyclical policy…
So while it makes sense in the abstract to have the government be a direct holder of equities, the details are just swarming with devils, demons, pitfalls, and mixed metaphors.