Luskin Explains the Cost of Delaying Soc. Sec. Reform
Donald Luskin’s latest – Krugman’s $600 billion bungle – cannot deny that Paul Krugman has caught George Bush and Joseph Lieberman in a blatant misrepresentation of what the Social Security Administration said about the alleged unfunded liabilities. But he defends this claim that the cost of delay is around $600 billion per year:
Here’s how it works. $10.4 trillion is today’s present value of the unfunded liability of the system. In other words, it’s the value of the assets you’d have to contribute to Social Security today to make it perfectly solvent forever. But you’d have to do it now, so that the $10.4 trillion could start earning interest immediately. If you wait a year, the system will have missed earning a year’s worth of interest. Assuming an approximately 6% interest rate (as the Trustees did), that year will cost the system 6% of $10.4 trillion — or about $600 billion. It’s that simple.
Luskin discovers the time value of money – or has he? First of all, he seems to think the return to the assets in the system is 6%. Not bad – but let’s more realistically assume a 5% interest rate. Let’s also assume that Donald owes me $100. I make this deal with Donald – pay me now or pay me $105 a year from now. Does he save $5 if he pays me today? Doesn’t paying me today invoke an opportunity cost? After all, Donald could invest that $100 in some of his favorite stocks. Then again, maybe he saves a bundle given his track record of advising his clients.
But let’s be fair to Mr. Luskin. This rant is a lot smarter than the latest supply-side silliness from Lawrence Kudlow. Taxes are way up? Check the comments – Larry’s readers are not so easily fooled.
Update: Luskin has another version here. I like this part especially:
Case in point: Krugman has written literally dozens of columns … blasting the Bush tax cuts for leaving wealth in private hands while the government is running deficits. If Krugman pursued this line of reasoning…
Maybe someone can point out to Luskin that the Soc. Sec. Trust Fund has almost $2 trillion in reserves and is currently running surpluses.
Update 2: Luskin continues over at that Club for Growth blog saying his rant has gone unchallenged. OK, he is ducking us at the Angrybear but he is responding to questions about his interest rate assumptions by assuming loan shark rates at 1% per week – compounded. So the annualized rate exceeds 67%? No wonder Luskin’s clients do so poorly! Someone call DiTech.