Krugman nails the con in the Bush Social Security Plan

[papau]

http://www.nytimes.com/2004/12/10/opinion/10krugman.htm?oref=login

Borrow, Speculate and Hope
By PAUL KRUGMAN

The National Association of Securities Dealers," The Wall Street Journal reports, "is investigating whether some brokerage houses are inappropriately pushing individuals to borrow large sums on their houses to invest in the stock market." Can we persuade the association to investigate would-be privatizers of Social Security?

For it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope.

Privatization would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already deep in deficit, would have to borrow to make up the shortfall.

This would sharply increase the government's debt. Never mind, privatization advocates say: in the long run, they claim, people would make so much on personal accounts that the government could save money by cutting retirees' benefits. Financial markets won't believe this claim, as I'll explain in a minute, but let's temporarily grant the point.

Even so, if personal investment accounts were invested in Treasury bonds, this whole process would accomplish precisely nothing. The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all.<snip>

[faithnotgreed]

1. its a shock when theres any sanity in the media but i know krugman

is one of the definite few

thanks for sharing the story

[wtmusic]

2. Pay attention when wise men, like Krugman,

start sidling toward the exits...

[MrMonk]

3. (1) "Privatize" Social Security

(2) Borrow trillions to support the transition.
(3) Pump borrowed money into the stock market.
(4) Stock prices surge upwards, forming bubble.
(5) "Smart money" (insiders) take their money, with profits, out.
(6) Bubble bursts.
(7) How do you spell "SUCKER"?

Am I paranoid or what? :crazy:

[Cronus Protagonist]

4. That's not paranoia at all

It's what they do. They did in in the last bubble and it worked so well, they took over the government and drained all the cash out so they can enact precicely what you project.

After that, the robber barons will be sitting on top of the world and the rest of us will be working in workhouses, begging for scraps.

The Robber Baron class loved it then, they hated losing it and they want it back; serfdom / slavery / indenture - whatever label one wants to use for that economic situation.




http://brainbuttons.com/home.asp?stashid=13
Buttons for brainy people - educate your local freepers today!

[Inland]

5. No. In fact, it recognizes that the reform

doesn't do anything except find suckers.

Take David Brook's column in the NYT today. He says that at least one reform plan makes sense, in that a) the SS has eleven trillion in unfunded liabilties b) you borrow two trillion and give it to people to invest in the stock market c) at the usual return of 4.7 percent in the stock market the US comes out ahead.

Krugman in his friday column points out that we are borrowing to invest in the stock market.

I point out that we could do the same as Brooks suggest by simply borrowing two trillion, investing it in the stock market without bothering with private accounts, and then pay the liabilities without doing the entire privatization crap.

So why would conservatives insist on Brook's plan? Because it creates losers. It creates a class which==as in any market==people will lose and people will win. The US borrows Two trillion that gets invested, some poorly, and the financial sector beats them. When the retirement age for the poor investors come, well, whose fault is it that the did badly? Either they will starve or the US will have to pay from general revenues to support them. And thanks to the fact that simulataneously with SS reform, all taxes with investement are being eliminated, the wages earners pay for that too.

[Luminous Animal]

6. Help please!

I am 100% against privatizing Social Security but I run a political discussion board and I am active in local politics and I am trying to understand this issue better in order to argue it better. I am such a dolt when it comes to understanding economics that I am having some difficulty arguing Krugman's side.

For instance he says this, "Privatization would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already deep in deficit, would have to borrow to make up the shortfall. "

I don't understand what shortfall Krugman (and others) are talking about. Does it mean the shortfall that would occur when paying out to those who choose to remain in the system?

Then this: "This would sharply increase the government's debt. Never mind, privatization advocates say: in the long run, they claim, people would make so much on personal accounts that the government could save money by cutting retirees' benefits."

What benefits would they be cutting? Those who have private accounts? If they have private accounts, where does the government come in? Aren't private accounts just that, accounts where the government cannot control the benefits good or bad?

And this: "By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits. "

How can the government cut benefits on "personal accounts"? How is there any government control at all on these "personal accounts"?

And finally this: "Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse."

If the government allows me to control 6.2% of my payroll tax to invest in a private account, wouldn't it be me (not the government) who is speculating on stocks? And, I need to ask again, why would the government need to borrow to fund this scheme. Wouldn't simply diverting the 6.2% to the private sector be the beginning and end all to privatization.

[54anickel]

7. There's a nice little piece out on mediamatters right now. Lot s of links

http://mediamatters.org/items/200412100012

[Luminous Animal]

9. RE: media matters

I've read this. I've done hours of research and I've come up with no pithy mainstream responses to my questions. I am so ignorant about the issue of stocks, bonds, borrowing and so on that I am having major problems arguing FOR Social Security.

[54anickel]

11. Why do you feel the need to argue FOR SS? Seems you're not

looking for answers regarding the diversion of funds to private accounts, but rather arguments against "killing the beast" all together. And that is an argument on the differences in ideology.

[Luminous Animal]

12. RE: Why do you feel the need to argue FOR SS?

I feel the need to argue FOR SS (in its current form) because the alternative being put forward IS private accounts. If I can make my case that:
1) "killing the beast" is unnecessary and
2) here are the reasons why and
3) private accounts are will not be any better,
then I've put pro-privatization people into a corner because their position is built on the ideology that SS is broken (or soon to be so).

It is apparent to me that Krugman is making a case that SS is not broken AND private accounts are not a viable alternative. The trouble I am having is understanding his reasoning on why private accounts are not a viable alternative.

[54anickel]

13. Private account may very well seem viable to those who feel they are

market savy, that includes a lot of the younger workers who may have done fairly well in the markets to date.

The biggest arguments against private accounts (besides the transition costs and the fact that it's not needed) that I've seen are 1)the fees that will be charged, 2)the investment consulting that many not-so-savy workers will be looking for, 3)what are the details (admin, investment options, brokerage selection, etc.) 4)the risks that are inherit in the stock market. What happens to those within say 5-10 years of retirement when there's another 1987 or 2000? I suppose if they weren't savy enough to divest into "safer" options that's their tough luck, but how much SS are they now entitled to? What if the market really takes a dive, like the depression? What safety net will have to be devised for all those who got socked?

It would be a better idea to open more 401-K/IRA type of options for people who want to take the gamble on higher returns, rather than divert funds from the current system. It would take so little to fix the current system compared to the transition costs involved. So, you have to ask, who and what are really driving this decision to go private?

Sorry, probably not what you're looking for. Like I said, without the details of the program it's fairly difficult to debate it. That's why you see more of the "if it ain't broke, don't fix it" arguments like Krugman than what you seem to be looking for.

Private accounts can't be considered a viable alternative to SS because the goals of the 2 are different, back to the different ideology. Private - I got mine, go get your own vs. Social - security for all, risk or burden shared by all for the betterment of society.

[54anickel]

10. ..

The shortage is what the fund will be short if people are allowed to divert a portion of the FICA tax they pay now into a private account instead. If the problem NOW is not enough coming in from taxes to pay for those recieving benefits, how will allowing $ to be diverted help? That's the shortfall. That's what they want to borrow for (to make up the difference). But they want to be able to span that expense over 75 freaking years! They've never done budgets that long - how many budget programs implemented just 40 years ago are still around?

Papau posted this regarding the 75 years.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x13105

The rest of your questions are more to the missing facts regarding the entire privatization plan. They just aren't putting a lot of details out there, probably by design. Instead they say how broke the system is, and they aren't really even able to back that statement up with facts. There have been many arguments on both sides of this. Of course the tax cut and the ME fiasco certainly helped to put a huge dent in the budget. Was it an attempt to break SS to begin with? They have wanted to "kill the beast" for years.

Here's an article from where the commision attempts to clarify

http://www.pasadenastarnews.com/Stories/0,1413,206~11851~2587290,00.html

Then of course, they have to deny that this will benefit the Street
http://www.washingtonpost.com/wp-dyn/articles/A53665-2004Dec9.html

Clinton had proposed a modernization of SS as well. I don't remember the details - he would have allowed money to be invested in some of the same trust or fund options that gov't employees have. Perhaps you should look back to the arguments they used against his proposal.

Can't really help with an argument against it beyond what you've seen as there just isn't enough information about the proposal available. You've read what the arguments are stating SS isn't in that bad of shape, it doesn't need this drastic of a change.

[many a good man]

14. Speculation

This is my understanding:

Shortfall -- actuaries estimate the inflow and outflow of funds into SS. Privatization will reduce the inflow by diverting it into private accounts. The money will sit in people's private accounts until they retire, which means it can't be used to pay out for people who are retired right now. That would make the SS trust fund run out of money much sooner.

Cutting benefits -- they aren't being specific so we must make assumptions based on the current system. Currently, the size of your SS check is based on a formula based on how much money you paid into SS during your working years. The more you put in, the more you get back, up to a maximum. Presumably, the formula will stay the same, meaning the govt will have to pay you less if your private accounts were more fruitful. I can only think they're talking about a kind of means-testing SS...

For example, if you made the maximum amt of money all your working years you would get the maximum SS payout. Let's say that figure is $2500/month regardless of whether you opted to set up a private account. Maybe the feds will keep that maximum at $2500 even when factoring the money you've withdrawn from the private account. So if your private accounts brought in $2000/month then the govt will only have to write you out a check for $500.

Who's speculating? -- privatization will take trillions out of the SS fund and move into the casino, er, stock market, instead of investing it in Treasury notes. The govt will still owe you a SS check even if you're private accts bombed. The govt will have to bail you out.

[yellowdoggess]

8. A sensible plan has been touted

and this is my first night of posting so I hope I do it right! If not, it is authored by Peter Orzag of the Brookings Institution (I heard him discuss this recently at a conference in DC). Modest tax increases in the next 10 years and little benefit reduction..but without PRIVATIZING.

Here's a partial:

"Social Security is one of America's most successful government programs. It has helped millions of Americans avoid poverty in old age, upon becoming disabled, or after the death of a family wage earner. Despite these ongoing successes, the program faces a long-term deficit and policymakers should make changes to it sooner rather than later. Addressing the long-term deficit would put the program and the nation's budget on a sounder footing. Restoring long-term balance to Social Security is therefore necessary, but lawmakers do not have to destroy the program in order to save it.

Our plan restores balance to Social Security without drawing on general revenues, preserves the program's basic structure, and strengthens its social insurance functions. Its combination of revenue and benefit changes reflects the type of balanced approach that was successfully adopted in the 1983 reforms of Social Security."

and the link:
http://www.brookings.edu/comm/policybriefs/pb126.htm

[Luminous Animal]

15. Thanks..

Thanks for helping me trying to understand this issue. Fortunately today I found a great site that clears up a lot of my questions: http://www.socsec.org/publications.asp?pubid=503 (Twelve Reasons Why Privatizing Social Security is a Bad Idea)

[stevebreeze]

16. I am working on an analogy to explain some of this

It is complicated especially when you are talking big number. All I have done here is lop a few zeros off to make the finances more relevant to regular people (as opposed to geeks like me).

I need some financial advice. I have a grasp on my income and expenses right now, and am planning for the future. This year my income is about $56,000 but my expenses are only $50,000 so I plan on banking the difference. My interest income is $8,900 I am putting that away for the future too. I have been doing this for years now and have a nest egg of $170,000.

My problem lies 15 years in the future. That year I expect my regular earnings to be $80,000 and an interest income of $20,000 but my expenses will climb to $86,000. I will also have a bank balance of $380,000 so you can see my financial problems are immense! Yes my expenses will exceed my regular income! I believe I have no recourse but declare bankruptcy.

Of course I would be laughed out of court with that much in assets and income greater then expenses. This is my point this is exactly the financial situation that Social Security is in, adding of course a few zeros to the end of my numbers.


If you like it feel free to use it.The numbers come from the Social Security 2004 trust fund report page 186.

[PROGRESSIVE1]

17. Krugman, Wiseman / Bush, Strawman