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GOP Social Security Talking Points: Why Do We Need Deform NOW?

Via Joshua Marshall provides a link to the GOP’s weekend retreat reading material. There is a lot of misleading nonsense in this document, so it may attract a lot of rebuttal comments from various blogging economists, but there is a set of claims in the very opening summary , which I’d like to focus on.

Under the heading “The Time to Act is Now”, the GOP talking points read:

The longer we wait to take action, the more difficult and expensive the changes will be. Under the current system, today’s 30-year old worker will face a 27% benefit cut when he or she reaches normal retirement age.

Doing nothing will cost the most in the long run – resulting in either dramatic tax increases or severe benefit cuts.

The first members of the Baby Boom generation turn 60 next year, in 2006. This is not a distant problem, but something that is coming our way quickly.

Under the heading “President Bush Has Set Forth Broad Principles to Guide Reforms”, we see:

There will be no benefit change for those receiving Social Security and those near retirement. For seniors, nothing will change, and nobody is going to take away their check.

We will not raise payroll taxes – higher taxes would slow economic growth.

Fiscal responsibility lowers growth? And those retiring in 2006 will be happy to know that Social Security reserves will continue to rise for another 15 years and last another 30 years after that. As far as workers in the future facing the prospect of benefit cuts relative to what the projections show now – it would seem workers in the future would likely fare even worse under Bush’s “Model 2”.

But the time to act now really puzzles me since the GOP is ruling out more payroll contributions AND is ruling out reductions in benefits for folks born before 1945. As I noted here, adopting a set of reforms in 2010 versus adopting them now would have exactly the same costs under these two constraints.

This is the GOP case for raiding the lock box? Ho-hum!

Update: There is a lot of advise on what not to say in this document and one piece of it is quite honest:

Acknowledge risks: Many of your listeners will not have a lot of financial education or investment experience, but they know that markets have risk – and nothing is guaranteed.

Yes, higher expected return comes at the price of higher risk. Glad this document advises the proponents of Social Security Deform to finally be honest about this particular point. But then doesn’t this mean a lot of supporters will have to be silent? In fact, there are lots of places in this very document where it sort of violates this cautionary note of honesty and good finance.

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A Decent Discussion of Social Security – So Why is Don Luskin Mocking It?

James N. Morgan is professor of economics emeritus at the University of Michigan and served on advisory committees to the Social Security Administration from 1966-69. The Ann Arbor News interviewed Dr. Morgan this weekend. Highlights include:

Q. What do you think is the most important thing for people to know during the upcoming debate over the future of Social Security?

A. They should know that it’s not a pay-as-you-go system. Even it’s defenders get suckered into talking about it as though the working people are paying for the benefits of the retired people. If you think of it as a compulsory retirement scheme where every generation pays enough to justify its own benefits, then you look at it and you say, “Am I getting a decent rate of return on my savings?” And that’s true right now. But if there’s any difference between the flows in and out, that’s the government’s responsibility, not Social Security’s. The government paid some people during the Depression who hadn’t contributed much, using the pay-as-you-go logic to justify that, but that’s long since past.

Q. We hear a lot of conflicting numbers and dates about when Social Security will or won’t have a shortfall of funds. What is the most reliable source of numbers, and why?

A. I would depend on Social Security’s own people, and on Paul Krugman, who writes regularly in The New York Times. Krugman is a professional economist who knows his business, who checks his figures. I would trust his figures, but I would also assume that Social Security would give you the right numbers.

STOP RIGHT THERE! We know Luskin had to find something to object to since Dr. Morgan said something nice about Dr. Krugman. So what does Luskin come up with?

“If the government does have to use some general tax money to pay the legitimate benefits of the baby boomers, it’s exactly the fiscal policy we need, to stifle what would otherwise be an inflation. You get a lot of baby boomers retiring and spending their legitimate money without earning anything, that’s a big inflationary pressure. So the crisis is no crisis at all.”

And you thought you’d heard every possible excuse for why there’s no crisis. Now you’ve got a new one: the insolvency of Social Security will cure inflation!

Not exactly what Dr. Morgan said. But of course, the Federal Reserve is concerned that the Bush fiscal policy represents a long-term stimulus that might raise inflation unless the FED raises interest rates. Maybe Luskin could take a course in macroeconomics from Dr. Morgan and learn why the FED is so concerned.

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Social Security’s Return for Blacks: A Suggestion for the Heritage Scholars

David John and William Beach take the low road in their attempt to justify the claim that Social Security hurts blacks by asking us to believe that Beach and Gareth Davis fully answered their critics back in 1998.

Rather getting into the name-calling over this issue, let me suggest that an unbiased estimate of the rate of return would be an interesting statistic and ask the Heritage crowd to take the high road suggested by Brad DeLong who simply linked to the paper by Kilolo Kijakazi.

Simply put, Beach and Davis want us to believe that the rate of return under Social Security for the average black is negative, but Dr. Kijakazi noted that their model made several faulty assumptions, which led to downward biases of this estimated rate of return. Beach and Davis could have redone their calculation using more plausible assumptions. I guess I’m being too cynical when I suspect they did re-run their model and found that an unbiased model did not give them the answer that their political bosses wanted. But I could be wrong and perhaps the Heritage Scholars could do the obvious – rerun their model using more plausible assumptions and report back.

Update: Jesse Taylor reads the lastest from Donald Luskin and corrects the most dishonest man alive. It seems Duncan Black piles on.

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Does the Club for Growth Understand Growth Theory?

Louis Woodhall writes in The Real Social Security Crisis is Economic Growth:

The Trustees of the Social Security Administration assume (in their “Intermediate” case”) that over the next 75 years, the U.S. economy will grow at an average “real” rate of 1.9%…America can’t live on a “starvation diet” of 1.9% real economic growth. Over the past 75 years, the American economy has grown at an average real annual rate of 3.43%.

Louis should read his own source more carefully:

For the intermediate assumptions, the annual change in productivity is assumed to decrease from 3.4 percent for 2003 to 2.7 percent for 2004, then to an average of 1.9 percent for the years 2005 to 2007. Though declining, these changes are relatively strong by historical standards. After 2007, the annual change in productivity gradually decreases to the ultimate assumed level of 1.6 percent by 2012. For the low cost assumptions, the annual change in productivity decreases gradually from 3.5 percent for 2003 to the ultimate assumed level of 1.9 percent by 2011. For the high cost assumptions, the annual change in productivity decreases from 3.3 percent for 2003 to 1.2 percent for 2004.

The reason the Trustees are forecasting this 1.9% real GDP growth is that they are assuming employment growth will be only 0.3% per year as they assume population growth will be about the same. The Trustees also note:

For the 40 years from 1962 to 2002, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.6, 1.1, 1.6, and 1.7 percent for the 10-year periods 1962-72, 1972-82, 1982-92, and 1992-2002, respectively.

In other words, much of the 3.4% per annum real GDP growth that Louis Woodhill notes as the average in the past has been from increases in population and employment.

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National Review Defends Bush Deficits Again

Brian Riedl writes over at the National Review:

America’s debt burden is actually below the post-World War II average. In fact, it’s lower than at any time during the high-flying 1990s…A better measure is the federal government’s debt ratio, calculated as the total federal publicly held debt as a percentage of America’s annual income (the gross domestic product). The current debt ratio – 38 percent – is actually below the post-World War II average of 43 percent. America’s debt burden is low by historical standards.

Table B-79 of the Economic Report of the President 2004 reports Federal debt as a percent of GDP: both total debt and debt held by the public. Since the latter is robbing the lockbox, let’s note that total debt relative to GDP was 65.3% at the end of fiscal 2004 and is projected to rise to 67.5% by the end of this fiscal year. By either measure, the debt to GDP ratio fell from 1996 to 2001 and has risen ever since. Of course, this ratio had risen from its 1981 level of 32.5% to 67.3% by 1996 due to the Reagan fiscal irresponsibility that Bush43 is repeating and Riedl defends.

Rieldl notes that lending insitutitions look at debt relative to income. They might also look at the fact that this White House wants to lock in tax rates that would insure that Federal revenues excluding Social Security contributions would forever be less than 12% of GDP whereas non-interest Federal spending excluding Social Security payments are over 14% of GDP with no White House ideas of how to materially change this.

Riedl’s claim tortures all logic to make an incredibly bogus claim. Now why would he do that? Why would the National Review publish this?

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From The Archives

From a 2/5/2004 post:

Here’s a proposal I’d like to see analyzed: means-tested matches, on a sliding scale, to Roth and Traditional IRA contributions, with EITC recipients getting some amount match-free.

Amidst all of the talk over privatization, I’ve yet to hear much along these lines. But this is a form of “ownership society” I could support — as long as (1) it is in addition to Social Security, (2) it is funded out of the general fund and not Social Security taxes, and (3) it is funded in a revenue-neutral fashion by, e.g., partially reinstating the estate tax.

AB

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Donald Luskin – Liberal

Seems the DONALD has been fielding the tough questions on Social Security reform with some interesting answers:

Q1: How will the transition costs be paid for?

A1: We can be sure the poor won’t pay any transition costs, because poor people have no resources with which to pay them.

Q2: How will he guarantee the safety of the investments?

A2: The Social Security personal accounts would be handled in an independent government-supervised trust fund environment just the way personal accounts are handled by the Thrift Savings Plan of the federal government — the plan that 3.5 million federal employees, including every senator and congressman, participate in.

Wow! That sounds mighty liberal to me. But then he really never answered Q1. As far as his answer to Q2 – someone help me here. How does TSP invest the funds of federal employers? If a lot of these funds are in the stock market, then the funds are subject to market risk. If they are invested more conservatively, all these claims of higher returns would be simply bogus under the Luskin plan.

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