Social Absurdity
I haven't gotten into the Social Security thing much, because the whole thing is just absurd. It's a fake crisis, very dishonest, but among things Bush is trying to do it ranks pretty low. It doesn't really matter.
That said, it's obviously a big deal in the public debate right now, so I am linking to this Krugman interview that basically tells you what you need to know.

29 Comments:
Daniel Allende here. I'd like to point out a few Krugman errors, without attempting to disagree with the thesis of what he's saying. After all, it is possible for someone to come to the right general conclusion for the wrong reasons.
It's difficult to understand why he's saying some of the things he's saying:
Quote: "First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts".
Most people will tell you that non-crazy, conservative, safe assumption rate of returns in the market are 6-8%, not 4%. If you make conservative investments with index funds, you'll get about that, and you'll pay about 0.5% of your return to the mutual fund companies. This comes with noticeable short-term (1-2 years) risk like Krugman says, but to the extent that past experience can be considered a guide, it comes with almost 0 long-term (> 10 years) risk. So I think that Krugman's analysis of the returns are utterly bogus. He should know better.
My other big problem with Krugman's statements are that he wants it both ways. Quotes:
"The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years." (and earlier) "2052. That's the year the Congressional Budget Office says the trust fund will run out. In fact, many economists say it may never run out. If the economy continues to grow at an average rate, the trust fund could quite possibly last forever."
First, Krugman is saying that the economy is going to do well enough to support the social security trust fund, so there's no need to worry about it. Then, he seems to express skepticism that the economy will do well enough for people to make money in the stock market investing their retirement funds. Which is it? By the way, the annual average growth rate of the US economy is 4-6%, so based on his statement, people should be able to make money in the markets, *even* given his lousy numbers which I described above. (Reference below)
None of this means that it's a good idea to sack Social Security. It just means that the numerical arguments against investing in the stock market are usually bogus. Of the people who invested in 1960 and cashed out right after the dot-com bust (i.e. in a time where you'd think valuations were at a 5-year low) they still came out way ahead of what they would have made with government bonds, or with their social security payouts. All investing, all finance, at the government or personal levels, are long-term games. Some people will get screwed on bad choices if they invest for a few years and then jump out. But if it is a lifetime thing, (a person's entire working life, for example) the data demonstrates that they will end up ahead of inflation every time.
People who use bogus numerical arguments piss me off, regardless of whether or not I agree with what they're trying to say.
References:
(Mutual Fund costs as low as 0.2% for index funds:
http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp)
(Treasury Bill Return Rates:
http://www.investinginbonds.com/cgi-bin/govpx2.pl )
(Rate of Return, Dow Jones, Historical
http://www.dow-trading-system.com/trade_history_annual_detailed.asp )
(Historical Growth Rate of the US Economy between 4-6%/year
http://www.billfewassociates.com/KC-whitepaper.cfm?newsID=175
)
Note that historical growth rate averages are long term. Yes, you can find many counterexamples. Average it out over a long period of time, and it holds. (I submit that we are talking about a long period of time, since these are retirement dollars and Krugman himself used the example of the 20 year old worker retiring in 2050 something)
By
Anonymous, at January 28, 2005 5:26 PM
You've got things a bit backwards. The "errors" you've found are points of ambiguity, but what Krugman is saying makes sense.
You say: "Most people will tell you that non-crazy, conservative, safe assumption rate of returns in the market are 6-8%, not 4%."
That's based on the historical growth rate. Krugman is using the trustee projections, which have the economy growing at a rate of 1.8% per year. Under those conditions, stock returns would be about 4%.
Then you say: "If you make conservative investments with index funds, you'll get about that, and you'll pay about 0.5% of your return to the mutual fund companies."
Your mistaken assumption is that the only fees involved are fund manager's fees. There is also significant overhead involved in overseeing the program itself. The system in Britain (which is a moderate failure at best) is very similar to what Bush is proposing, but on a smaller scale. Thus it's reasonable, even generous, to assume that the fees here would be similar.
So in fact, Krugman is not trying to have it both ways - the GOP is. Krugman's merely pointing out that if the economy is going to grow at a normal rate, Social Security does not need to be changed. If the economy is going to grow at an unusually anemic rate, privatization is not going to help.
No one is trying to make the argument that it's not a good idea to invest money in the stock market. In fact, if Bush were proposing the private accounts system as something totally separate from Social Security that theoretically might one day replace SS if it were a success, that might be worth talking about.
However, the central question in the social security debate right now is whether or not Social Security is facing a financial crisis. It isn't. Period.
By
RaulGroom, at January 28, 2005 7:56 PM
"""That's based on the historical growth rate. Krugman is using the trustee projections, which have the economy growing at a rate of 1.8% per year. Under those conditions, stock returns would be about 4%."""
4%? Over what meaningful time period? 2-5 years? That's quite possible. If there's a forecast from the past that goes longer than that time period that is even approaching reliable, I'd sure like to hear about it, because an accurate or reliable long-term forecast would be revolutionary news for the world of economics. Up until now, the best forecast for long-term performance *is* the historical growth rate. In the short-term, such a prediction is essentially useless information since the context of the discussion is people's lifetime span of work.
"""In fact, if Bush were proposing the private accounts system as something totally separate from Social Security that theoretically might one day replace SS if it were a success, that might be worth talking about."""
Now I'm confused. If it's a huge monolithic government program to set up and administer the funds, why are we paying mutual fund managers? If we're paying mutual fund managers to hold the ostensibly private accounts, what's the need for the monolithic government program? OK, maybe it's both -- just wasteful government duplication. Even so, if there *is* such a government program, can we really argue that taking this action is putting the money outside of the Social Security system? Besides, where do people think the Social Security trust fund itself is invested? Under W's mattress? Where if not in the global securities market?
"""The system in Britain (which is a moderate failure at best) is very similar to what Bush is proposing, but on a smaller scale. Thus it's reasonable, even generous, to assume that the fees here would be similar"""
Aside from the strageness of Bush wanting to emulate the programs of a substantially more socialist country, claiming this drain ignores the also-reasonable issue of bulk discounting. When the government buys anything in bulk, they get a huge price cut. The best examples here are military hardware, professional services, and let's not forget prescription drugs and healthcare services. They get such a discount by buying as a single unit, their suppliers complain loudly about it.
Not to say that the government wouldn't figure a way of making the setup of these accounts expensive (I'm sure they would be) but estimating it to be roughly the street price for a private citizen times the number of social security enrollers isn't realistic. Perhaps 30% of that number might be in the right ballpark.
By
Anonymous, at January 28, 2005 8:34 PM
Quote (from WashPost):
While he [Alan Greenspan] previously has suggested various ways of trying to restrain the growth of future benefits to bolster Social Security's future solvency, Wednesday he appeared to deride such efforts as merely "patching a system that is fundamentally inappropriate for the nation's future."
"Something's got to give," he said. "We have to find a better model."
[End Quote]
I think someone needs to have this guy check his job description. As a central banker, he is supposed to be setting interest rates, adjusting the money supply to optimal levels, and so on, not making political pronouncements. Calling Social Security "fundamentally inappropriate for the nation's future", besides being vague nonsense puffed up by rhetoric, is clearly a political judgment. He is not telling us what our financially viable options are for fixing social security. Instead he is telling us what option we should take among those financially viable options.
I wish someone could tell me why a middlingly competent central banker, with obvious ideological axes to grind, is fawned over by our media as the last word in politically impartial and far-sighted wisdom. If this goes on, we'll need to have the Jacksonian revolution all over again. Down with The Bank of the United States!
_________________
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