Social Security Isn’t Broken - So Why Does Greenspan Want to Fix It?

[mulethree]

This is from November, but I don't find it in DU anywhere.
Some interesting info on growth-rate assumptions and the
bond markets.


Social Security Isn’t Broken

So Why Does Greenspan Want to Fix It?

BY DOUG ORR

http://www.dollarsandsense.org/1104orr.html

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In a generous DC plan, a firm might match the worker’s contribution up to 3% of his or her pay. With total contributions of 6%, average wage growth of 2% a year, and an average return on the investment portfolio of 5%, after 35 years of work, a retiree would exhaust the plan’s savings in just 8.5 years even if her annual spending is only half of her final salary. If she restricts spending to just one-third of the final salary, the savings can stretch to 14 years
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The logic is appealingly simple, but wrong for two reasons. First, this "old-age dependency" ratio in itself is irrelevant. No amount of financial manipulation can change this fact: all current consumption must come from current physical output. The consumption of all dependents (non-workers) must come from the output produced by current workers. It’s the overall dependency ratio—–the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work—that determines whether society can "afford" the baby boomers’ retirement years. In the 1960s we had 1.05 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 1.27 workers per dependent. We’ll have more workers per dependent in the future than we did in the past. While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.

Second, the "demographic imperative" ignores productivity growth. Average worker productivity has grown by about 2% per year, adjusted for inflation, for the past half-century. That means real output per worker doubles every 36 years. This productivity growth is projected to continue, so by 2040, each worker will produce twice as much as today. Suppose each of three workers today produces $1,000 per week and one retiree is allocated $500 (half of his final salary)—then each worker gets $833. In 2040, two such workers will produce $2,000 per week each (after adjusting for inflation). If each retiree gets $1,000, each worker still gets $1,500. The incomes of both workers and retirees go up. Thus, paying for the baby boomers’ retirement need not decrease their children’s standard of living.
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Greenspan is worried because he sees history repeating itself in the form of President Bush’s tax cuts. In his testimony, Greenspan expressed concern over a potentially large rise in interest rates. This is his way of warning about an excess supply of bonds. Starting in 2020, Social Security will have to sell about $150 billion (in 2002 dollars) in trust fund bonds each year for 22 years. At the same time, private-sector pension funds will be selling $100 billion per year of financial assets to make their pension payments. State and local governments will be selling $75 billion per year to cover their former employees’ pension expenses, and holdings in private mutual funds will fall by about $50 billion per year as individual retirees cash in their 401(k) assets. Private firms will still need to issue about $100 billion of new bonds a year to finance business expansion. Combined, these asset sales could total $475 billion per year.

http://www.dollarsandsense.org/1104orr.html

[Cha]

1. Thanks for this thread..I'm

bookmarking it so I can have this info at hand.

I would say greenspan wants to "fix it" because the bushists told him to..and they want to steal it for wall street..how am doin'?

[trezic]

2. Thanks

Good article.

[indepat]

3. Greenspan is just completing the job he started as a chief architect of SS

refunding: suck in all those payroll taxes from the poor and the middle class while excusing the most affluent from payroll taxes on much/most of their income, then support tax cuts which primarily benefit those who paid payroll taxes on but a little of their total income, tax cuts funded by a raid on the SS trust fund. By George, this is so simple that I think I got it but wonder why everyone else doesn't.

[housewolf]

4. Because

he's an Ayn Rand Objectivist who think that programs such as Social Security are unconstitution and lead to a society of immoral people who are dependent on government services who will not take care of themselves and so are thrilled with the idea of dismantling Social Security and putting all those dollars into the hands of Wall Street players.

[DaedelusNemo]

5. solution more expensive than problem

Given the math in the article, the 'unfunded liability' of SS is roughly 3 trillion during the next fifty years. Bush's plan involves borrowing 17 trillion during that same time, adding to our deficit enormously - interest payments on it are already projected to be more expensive than SS, and it's just 7 trillion now.

Excellent points about dependents vs. retirees, and the productivity growth - although of course if that productivity doesn't translate into wages we're screwed anyway.