Many Unhappy Returns

[Condor]

OP-ED piece in the NYT, a better economical foundation for this article's assertions can be found in the snipped-out piece.

http://www.nytimes.com/2005/02/01/opinion/01krugman.html?oref=login

Many Unhappy Returns

By PAUL KRUGMAN
Published: February 1, 2005

The fight over Social Security is, above all, about what kind of society we want to have. But it's also about numbers. And the numbers the privatizers use just don't add up.

<snip>

They (the privatizers) can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.

It really is that stark: any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black.

[Inland]

1. Assuming same economic growth, present system is better.

This is Krugman's point, and I say more:

1. Let's assume the economy does well for fifty years--as assumed by the Bushites when they are pushing stock holding private accounts--MOST people would in the privatization scheme do okay, some would do well, and some would make bad investments and go broke.

But the present system would, under a decent economy for fifty years, also then never go broke, as the receipts would make up any shortfall. That's Krugman's point.

2, LEt's assume the economy does really badly for fifty years--as assumed by the SSA and Bush when he wants to show the current system in the red in 2052--NO people in a privatization scheme would do okay.

Under the present system, however, 70% of payments would still be made.

Now I ask you, if the country is having a crap economy for fifty years, and the country is impoverished, what is so unfair, bad, awful in the relative scheme of things for retirees to get seventy percent? I think if I saw two generations of shit hitting the fan, I wouldn't mind the seniors joining the rest of the country in near poverty.

Unlikely, but if country's economy is put in the toilet, seniors are going to join us in it, no matter what. Even under Bush's plan, do you think that the nation wouldn't find a way to cut back for seniors if the US has a long decline of wealth and income?

So my solution, remains, do nothing. Not a damn thing.

[DrRang]

2. All those convenient deaths

Another point I never hear brought up: When do the demographics start looking favorable again? The privateers are always bloviating about how the baby boomers are a pig in a python that will stress the system too much, with fewer workers supporting more retirees. But by the time the crunch comes--somewhere between 2042 and 2052--most of the baby boomers will have died off, and the balance will have tilted back to more workers, fewer retirees, as the "echo boomers" will still be working.

[Inland]

3. I wondered about that myself

Is there a demographic bubble, so that any shortfall is temporary? If the system is able to again pay full benefits after, say, ten years, then it is another argument to do nothing.

[papau]

6. From 2030 on the demographics are stable. With reasonable GDP growth no

problem (Bush uses 1.6% - which 1/2 of historical average - and then uses 7% as return for private accounts - which is not possible in a world of 1.6% annual GDP growth).

[antigop]

4. But wouldn't stock prices go up due to increased demand?

Far be it from me to argue with Krugman, but in a privatized scheme, wouldn't the supply of stocks remain relatively fixed, but the demand would mushroom as people invested in stocks in their private accounts? Wouldn't that drive up the price of stocks tremendously? Wouldn't the laws of supply and demand come into play?

Krugman says
>>
In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.
>>

But wouldn't stock prices go up astronomically because of the money being poured into private accounts?

Not trying to make the case for privatization. I'm just trying to understand the economics here.

[papau]

7. There is an infinite supply of places to put money to get return, Stocks

do not increase in value just because most folks find they get a better return from Bonds and savings accounts and therefore put their money in Bonds and savings accounts.

Stocks are not a commodity that is in short supply but needed for daily living.

[antigop]

8. I see what you are saying, but....

You will have a LOT of people with private accounts and they will choose to put it in the stock market -- people who previously did not put it in the market or did not put in as much. Won't there be a huge influx of dollars into the stock market, driving up prices?

Seems to me all we will be doing is selling over-inflated stocks to one another, until something makes it crash. (kind of like tulip bulb frenzy in Holland)

[papau]

10. they will put money into market if return is better than other places

relative to risk.

Only equity mutual fund flows actually measure "demand" as the funds MUST put the money to work in stocks.

A huge influx of dollars into the stock market that drives up prices causes a "bubble" -which is eventually popped. Of course we can design the accounts so as to force a really big bubble by forcing money into equities with folks not able to move out of equities. And that bubble would last a few years - until a really big "pop"! :-)

Only the rate of return expected over time drives investment decisions - and the non-social security monies in the market will call the shots.

A neat variation on the bubble is the Saudi Stock Market where the state supports the prices via oil revenue. I have wanted in for 50 years - but they keep telling onlu Saudi citizens are allowed to buy and sell!

[LiberallyInclined]

11. that's part of the plan- but then they'd drop back down-

when all the people who held stocks pre-Social Security Privatization Boom sell their holdings and take their enormous windfall profits...and after the bottom drops out, they can use a little bit of that cash to buy back into their original holdings.

kinda nifty how that works, huh?

[Ravenseye]

5. Exactly

I just read this on the op/ed page. This is exactly what I've been saying to my conservative in-laws.

Assuming the same level of economic growth no matter what, social security as it is works better. This is a meme that needs to be spread. People are looking at the social security numbers from the CBO figuring 1.6 percent growth and comparing them with privitization plans with 6 to 11% growth. Just insane. Using the same growth numbers there is no way that privitzation beats the current system.

[TexasLawyer]

9. I LOVE Paul Krugman!!!

Sorry, I just needed to say that.