Krugman's latest -Gambling with your retirement

[BlueInRed]

http://www.nytimes.com/2005/02/04/opinion/4krugman.html

[BrklynLiberal]

1. Krugman is the best. Thanks for posting.

[BlueInRed]

3. isn't Krugman the best!

[bklyncowgirl]

2. Great explanation. Even I could understand it. nt

[Martin Eden]

4. I don't understand -- please explain

Here's the part I don't understand:

So people are expected to take a loan from the government and use it to buy stocks, and if that turns out to have been a mistake - well, too bad.

Color me skeptical: will retirees with private accounts that performed badly really be forced to repay their loans in full?


I assumed the taxes diverted from SS into private accounts would be the property of the individual -- even if he or she has limited control and no access to it until retirement.

I understand that the percentage diverted into a private account would be deducted from future SS benefits, and also that poor investments could render that account less valuable than those benefits would have been.

What I don't understand is, how is this a loan that will have to be paid back by the individual to the government? Doesn't the money diverted into the private account belong to the individual regardless of how well the investment performs?

[mulethree]

5. You do understand

The personal accounts require additional government borrowing, but they don't cover the cost of that borrowing.

They treat the current SS system as if all your FICA was put into a trust fund and invested in treasuries until you retire - which just ain't so.

By their reasoning, the 4% they borrow to make up for your diverted taxes is directly replacing borrowing that would have been done within the SS Trust.

In the real world, 75% of your FICA goes directly to paying benefits and only 25% gets invested in the trust fund.

So the 'transition costs', are not addressed and would either need to remain as general obligation government debt outside the SSA system, or be financed by benefit cuts of one sort or another.

I think you understand better than Krugman does. He implies that the personal account will pay back the debt, but the President doesn't do that - he leaves it hanging because it makes the personal accounts look bad. * can say - if you can invest better than 3% over inflation (Plus 0.3%) then you'll come out ahead!! instead of saying 'if you can invest better than the ral return on treasuries+10% then you'll come out ahead'.

[Martin Eden]

7. Yeah, I guess I do understand

The "loan" is the government borrowing to fund the transition costs. Money diverted to private accounts creates a shortfall in funding for benefits to older citizens who aren't particpating in privatization. If these benefits are not to be cut, where are the funds supposed to come from?

Since the privatization scheme is related to Social Security, will the funds be drawn from the trust fund, hastening its depletion? If not, will the cost simply be added to the deficit?

The fact is that privatization does nothing to solve the financial shortfall that is expected in 2042 or 2052, unless the transition costs are NOT drawn from the trust fund and IF SS benefits are reduced for those with private accounts by a percentage greater than was diverted to their accounts. This reduction would be palatable if the returns from investments minus fees are significantly greater than the return from SS.

Even if the private investments perform well and SS benefits can be reduced commensurately (a big IF), this savings would not likely come close to offsetting the initial transition costs with interest on that debt.

SS itself can be sustained in its current form indefinitely with slight adjustments now, such as indexing benefits to inflation rather than wages and raising the cap on taxable income. The REAL problem is the budget deficits created by the Bush tax cuts and war of choice in Iraq. The SS trust fund was used to finance these policies and if the money owed to the trust fund is to be repaid, it will have to come from general revenues or simply be added to the deficit.

This definitely presents a problem, but the privatization plan only exacerbates it -- which was probably the plan all along.

Most young people are already of the opinion that SS will not be there for them when they retire, so naturally private accounts make sense to them. The mindset is being established that SS is unsustainable, that the funds will run out in 2018 when benefit payments begin to exceed ioncome from payroll taxes, and that the trust fund itself is little more than an accounting gimmick consisting of worthless IOU's.

This is not a recipe for saving SS, it is a scheme for destroying it. The fiscal pain of the transition costs will blamed on the SS system rather than on the scheme, and the insolvency -- combined the greater liabilities of the Medicare system -- will be the final death knell of FDR's New Deal and LBJ's Great Society.

This isn't about about saving SS or even about providing financial security for retirees -- it's about achieving the long term ideological goals of "conservative" hardliners who long for the unfettered capitalism of 100 years ago that produced vast fortunes for wealthy capitalists and deplorable living standards for workers. Carl Rove's model of government is the McKinley administration of that era.

The bonus for them is that it is all being made possible by the deficits caused by the tax cuts purchased with their campaign contributions. The real pain will be felt by working Americans who would have benefitted from the entitlement programs that are being bankrupted. The SS trust fund was built up by decades of increased payroll taxes, which are essentially being transferred to the wealthiest Americans in the form of tax cuts. It is Robin Hood in reverse on a grand scale, with the Robber-In-Chief campaigning around the country to convince the poor it's for their own good.

Does the Democratic Party have what it takes to expose this scheme for what it really is and make a stand against the unfettered greed that is in the process of stealing our future?

[mulethree]

8. Does the Democratic Party have what it takes

Do they have the balls to say 'raise taxes'? To push for Kerry-style repeals of tax cuts on those earning over $200K? To end corporate welfare and the welfare for capital gains earners and dividend earners and inheritances?

The SS trust is built by a flat tax that only applies to the lowest 80% of the income scale.

It has financed spending which should have been financed by a progressive income tax and corporate taxes. Now they've reduced the higher end income taxes, corporate taxes, capital gains taxes, and hope to flatten out the tax scale even more. By the time 2018 comes around, they'd like to arrange for the bottom 80% to be re-paying the trust fund redemptions, sort of making the flatter tax scale retroactive in regard to past deficits.

I'm pretty sure they intend to get the transition costs worked into the benefit cuts on the 'social' 2/3 of the system. This will make their 'personal' 1/3 look better.

I'm looking forward to the reaction from the 50% or so who make between $25K and $87K. If they are convinced that the personal accounts are good, then they'll be pissed about the $1000/year cap. It seems to exist only to limit the transition costs but limits a $87K earner to 10% 'personalization' while those $25K-and-under get the full 32% 'personalization'.

Bleh - the whole system violates the KISS principle and the 'personalization' makes it twice as bad.

I get the feeling that "the unfettered capitalism of 100 years ago that produced vast fortunes for wealthy capitalists and deplorable living standards for workers" is one or the other of 'freedom' and 'liberty' that Bush wants to spread worldwide.

[mulethree]

6. The background briefing is great

Krugman links to a press conference transcript - http://www.nytimes.com/2005/02/03/politics/03social-txt.html

Which looks like the most informative info yet on the administration's SS 'plan'.