Redstate

Under the proposal you favor, and taking your average of 7.2% returns, what is the peak, aggregate market value of all PRA's?

According to the President we need personal accounts to save SS.  In reality we will be taking two to five trillion in more debt and bankrupting the system for a wallstreet welfare scam.  That is why his proposal is DOA.

However, by focusing too heavily on solvency (which can always be addressed through tax increases and benefit reductions as occurred in 1977 and 1983), conservatives are really missing an unprecedented opportunity to attract the next generation of Americans to their cause.  After adjusting for inflation, the Baby Boomers' return on their taxes will be only 2% with that return turning negative for future generations.  As a historical comparison, between 1926 and 2003, corporate securities averaged 7.2% after adjusting for inflation.  

IMHO, the greatest tactical mistake of the current administration was to argue that private accounts are a solution to the issue of solvency.  Had our first step been to discuss the creation of an "ownership society" rather than scaremongering on an alleged "crisis" (and it was scaremongering; no other word for it), we'd be twenty points ahead in the polls.*  And it's a shame we're not, because private accounts are, in fact, not only good for America, but profoundly powerful as a means of social justice.  They're not only good economics; they're the right thing to do.

Since I've been singing this lonely tune from the start, forgive me for adding a December 21, 2004 ObWi post as a chorus to your diary, in order to present my views in (relative) full [link, graphics and internal cites omitted]:

Security, social and otherwise

What boots it at one gate to make defence,

And at another to let in the foe?

John Milton, Samson Agonistes, Lines 559-60.

My grandfather on my mother's side worked in small-town New England factories for more than forty years after he returned from World War II.  It was precise machine work, carefully done, and it paid relatively well for the town and the job.  But there never was much for him to save.  He retired at 65, drawing a small pension.  

His savings went kaput long ago. He needs his Social Security checks.  There's not much to those checks, however; by the end of some months, he has nothing.  (It has become something of a game for my parents to trick him into taking their money.)  Day to day, week to week is how he lives on the government checks, in a rusting Quonset hut -- a relic of the war that opened his adult life.  

Social Security is not yet in crisis; credit Drum and DeLong for finally convincing me.  It can continue in its present form for at least a decade, and likely much longer.  But that does not mean that it should.  The lack of a crisis is not evidence of success.  

My grandfather, after all, is not alone.  A person born in 1925 who worked for forty years and retired at age 65 at a decent wage ($40,000) receives just under $19,000 in benefits per year today.  This is not a sum on which one lives the high life.  Indeed, it's barely getting by -- if it's getting by -- in most of the higher-priced places in the land.  

Moreover, the money that our hypothetical retiree receives is not the fruit of an investment.  It was not once used to build a factory or buy a new computer or train a new worker or start a company.  It was not put into some business, did not grow by the effort of others, and will never pay dividends.  It's a simple transfer, a from-here-to-there wire transmission, doing no work along the way.

We need to stop shuffling checks from person to person in a generational trading game of IOUs and paid-in expectations.  We need to build a system in which retirees own something -- a stock, a bond, a piece of their former employer -- that is theirs, rather than relying upon the passing benevolence of the voters.  And, better, a system in which the money paid in actually does something -- creates a job, builds a factory, starts a company -- that benefits us all.  An ownership society, the Das Kapital dream refitted for capitalist clothes, in which the workers do own the means of production.      

Privatizing Social Security will entail risks.  I will be the first to admit that it can be done poorly and that it will not cure all ills.  There are no silver bullets in this gun.  

But that's part of the point.  The present system is no silver bullet, no too fine thing.  Indeed, judged by the standards to which some hold privatization, the present system is an abject failure.  Thus, the fact that privatization is also not a silver bullet is hardly a knock against privatization.

The question to ask is whether privatizing a portion of Social Security has the potential to be better than the current system.  Frame the question that way -- the correct way -- and then let's have the debate.

UPDATE:  Jeremy Osner makes the following observation, which is echoed by several others in the thread:

But: advocates of ownership need to recognize that if you own something, there is a possibility that it will lose its value. Ownership entails risk; social security means a level of risklessness.

Sebastian Holsclaw (who ultimately disagrees with me, it should be noted) makes the point well in the thread, but it bears being made upfront:  All forms of Social Security are risky.  A significant, long term market failure will cause a private system to fail, the current  system to fail, and any conceivable new system to fail.  The asteroid strike won't care about the color of your parachute -- to mix metaphor and cliche'.  

It is important to remember that, over the long term, the modern stock market has always shown significant aggregate returns.  Even for the 30-year period from January 1, 1929 until January 1, 1959 -- a period that encompassed the Great Depression and a World War, among other things -- stocks were a good bet (graph of S&P 500):

 There is no reason to believe that the future will significantly differ.  Or, put another way, if the future does significantly differ, it won't much matter what we do to Social Security.

von

*Although seldom discussed, I'm convinced that part of the problem was the fresh memory of the crisis of Iraqi's WMDs.  There was an element of Chicken Littledom for me the second time around.

Costs of implementing a new system is nowhere to be found.  The IT portion alone would run into the billions.  But it's nowhere to be found.  

Discussed here.

You either have no clue about how PRAs work or you're just trolling for kicks.  There is no "new" debt.  PRAs move liabilities forward.  They take the deficit that will hit in the 2040s and deal with it sooner rather than later.  It may feel uncomfortable to pay for it now instead of then, but it doesn't add any obligations.

Trolling is pointing out logical falacies with the Presidents idea of private accounts?

If you don't intend to cut benifits when private accounts are carved out of SS's revenue stream then you will need to finance the consequent unfunded portion of benifit payments with new borrowing, new debt.  This is necessary because the carve out represents money taken out of the FICA tax/benifit program and salted away as the personal property of the private account owner.  

I'm very skeptical on the Ryan-Sununu bill.  It has 2 major flaws that I think should eliminate it from serious consideration:

1> First and foremost it sets the precident of allowing Social Security to be subsidized from the general revenue. The foundation of Ryan Sununu is that since more investment will increase growth in the economy, then it's reasonable for the government to use at least a portion of the increased revenues to subsidize Social Security. That is very dangerous. Without the restraint of keeping social security within the money it brings in, congress will fall over themselves to offer larger payouts. After all, it's being subsidized now. Social Security must be made stable on it's own, not using federal subsidies. Any plan that relies on infusions of cash with no end in sight is a non starter.

2> Ryan-Sununu depends on long term, unspecified government spending restraint. One lesson of the last 25 years is that long term spending restraints dissolve as soon as the ink is dry on the legislation. Ryan-Sununu depends on these unspecified spending restraints to partially offset the raid on the treasury. However congress is not bound by such restraints. Any spending cap can be removed by a simple majority vote. Trusting future congresses not to tinker with budget caps is not a sound foundation for a retirements system.

Ryan-Sununu is a very simple bill. It promises general revenue $ to social security while promising future budget cuts to offset the revenue diverson. It depends on politicians keeping past promises not to increase spending as more important than current promises to constituents. In other words, it asks politicians to perform an unnatural act.

I don't have a problem with a raid on general revenue to finance transition costs to a system with private accounts. However Ryan-Sununu's long term dependence on general revenue is extremely troubling to those of us who mistrust congressional faithfulness to budget pledges.

I also think that personal accounts within social security are a good thing. But they're not a painless way to deal with the social security problem and shouldn't be marketed as such.

There are 3 ways to put social security back on a path to solvency -- benefit cuts, tax increases, or subsidies. Ryan-Sununu chooses the latter option, which I consider the absolute worse choice of the 3.

First, it might help to briefly remember that the SS trust fund (TF) is a complete fiction. All payroll taxes are collected and deposited in general revenues and an IOU is deposited in the TF.  Those taxes go to pay current benefits and other, unrelated government spending -- in fact, excess SS revenues have subsidized federal largesse for years.  These short-term Social Security surpluses will continue to pour into the general fund until 2017 so why can't they be used to preserve the system?

Second, many personal account plans (including Kolbe-Boyd, Johnson-Flake, DeMint, and Ryan-Sununu) transfer general revenues to the TF to "backfill" current benefits.  Furthermore, Ryan-Sununu's general revenue subsidy is NOT unlimited "with no end in sight"; it is temporary.  The plan calls for a "reverse transfer" of TF resources back to the Treasury in 2038.  Add-on accounts (Shaw) are the real problem if you care about the general revenue precedent, because the subsidy is permanent.  

Third, far from depending on long-term spending restraints, Ryan-Sununu demands it.  It is the second phase of the "starve the beast" strategy.  The Bush tax cuts were the first.  The writer IS correct in that no budget retaining wall ever proves particularly effective.  The only strategy that has ever worked is to get the money back in the hands of the people who sent it and away from Washington, D.C.  This was proven during the late 1990s when Congress could not wait to spend the surplus.  The budget caps were blown, and spending offsets were the farthest thing from everyone's mind.  If you don't believe me, look at the growth rates in federal spending during the time we ran surpluses versus the last few years.  They were much, much higher.

And this is why Ryan-Sununu is unfairly called the "free lunch" bill.  There will be substantial pain involved when countless government programs and constituencies come looking for their handout and it is sitting in some worker's personal account.  

Fourth and finally, Ryan-Sununu IS a simple concept, but it is the brain child of some very bright lights, including: Martin Feldstein, Phil Gramm, Tom Saving (one of the current SS trustees), and two of our brightest Members of Congress, Paul Ryan and John Sununu. So maybe it's time that we give it the serious consideration it deserves.  

 A couple of notes:  

 The SS Trust Fund is fiction. Absolutely true. However I'm not sure any other way to set up this type of account. The excess SS taxes now go into Treasury instruments, reducing the government's need to borrow on the open market. But I do agree that this slush fund increases spending by giving congressmen a way to mask their prolific spending.

 Ryan-Sununu demands spending restraints. I also demand spending restraints, but I don't have any way to bind future congresses to my will, and neither does Ryan-Sununu. Congress can, and frequently do, waive spending restraints with a simple majority vote. We've had dozens of gimmicks over the years that were supposed to keep spending in check. Usually an emergency comes along (drought, flood, war, etc) that allows a few exceptions and soon the restraints are forgotten. Gramm-Rudman-Hollings was the most successful in the 1980's, and it lasted only about 7 years before completely abandoned. Other such restraints have been tried, and usually work for a year or 2. Ryan-Sununu depends on spending restraints far into the future. That's just not a stable platform to base a retirements system upon.

My basic problem with Ryan-Sununu is that it has the feel of a painless gimmick. Subsidize the system now, and put off hard choices on the prayer that congress will be fiscally responsible for the next 30 years or so. A much better course is to get the system in balance now. General spending restraints are good, but mixing them in SS reform just confuses the issue.

Too many things can go wrong. Congress can increase Social Security benefits with the stroke of a pen. Demographics can change just as easily. Temporary subsidies can continue forever if all assumptions fail to materialize.

One of the things that Ryan-Sununu fans mention is an analysis by the SS chief actuary. Do you have a link to that? It would be interesting to see what is actually in that. With the right assumptions, any plan can look good.

Well, maybe when we roll out industrial strength cloning, my friend - but in a world where we still demand parents to produce chillin, it just ain't so.

More likely than cloning...

Demographic changes include longer lives -- which has been happening for years and play havoc with long term planning.

Demographic changes include medical advances that don't increase longevity but allow people to stay in the workforce longer.

Demographic changes include immigration rates -- immigrants tend to be younger than the general population, and tend to have more children.

Demographic changes include people staying in the workforce longer (or shorter) than parents.

Demographic changes include people getting richer (or poorer), which makes it harder (or easier) to means test social security.

Demographic changes include bringing new people into Social Security. Some state retirement plans are outside social security. Bringing them in would change the calculations.

I could come up another half dozen other demographic changes that will affect social security over the 50 year horizon. None of which require cloning.

for the biggest private account carve outs possible?  Kind of taking the social out of social security huh?  How about 100% carve outs?  Think of the returns!

If I divert 4 of the 12.4% (roughly 30%) payroll tax to a PRA and then I receive 30% less in promised benefits, it is revenue neutral in the long run.  If I take a 33-5% cut in promised benefits for that 30% diversion, then it saves money in the long.  Only if I take out the 30% and get the same promised benefit in addition to my PRA is it a net loss.  But NO ONE is proposing that.

The idea is to transfer a portion (30%) of your SS from a government run, promised benefit to a market-based guaranteed private account.  If you think new debt is created in the long run, you're drinking too much kool-aid.

If we were starting a new system now that would actually be a better system for providing a larger nest egg for more people.  But we have to pay all of the people who are in retirement now in addition to those who are going to retire in the near future.  So in essence, our generations are going to have to double pay.  Somebody has to do it.  

Congratulations nashoba, your diary got mentioned in the "insider" Hotline daily newsletter.  They even excerpted a couple paragraphs.  To my knowledge, yours is the first non-editor article to be referenced in the Hotline.  Congrats!

The amount you put in SS has to cover 3 different costs that are a part of the system, no matter how much you put in...

1.  Transaction Costs. It costs the government to employ buildings full of people to make sure payments are made, PRA's are set up correctly, etc.
   
2.  Social Security is also an insurance program. If you get disabled, it pays, even if you've never paid a dime into the system. Therefore everybody has to pay for that insurance, whether you use it or not.

So if you cut your payments into the system by 30% then in the long run the payouts will be reduced by more -- maybe 35%.

Your scenario is 'revenue nuetral' for the individual but not for the system which relies on current reciepts to pay benefits, the system suffers cuts today.  Thus new debt is created today, it's a process known as cashflow, google it!

All private acount based SS 'fixes' suffer the same logical fallacy in attempting to re-orientate a successfull program of social insurance toward an individual market based system which completely discounts the desirable elements of gauranteed retirement benefits, survivor/dependant benefits and disability benifits for the questionable utility of getting back what you put in with some small opportunity for marginal gain.

The new debt "created" today is debt that we already have.  If we owe $2 trillion over the next 10 years that is $2 trillion we NO LONGER OWE in 30-40 years.  It's actually more than $2 trillion that we save which is why it's a good deal.

Looking at the next 10 years without looking into the future seems to distort your view of PRAs.  So be it.

Social Security isn't an investment scheme, it's an insurance policy.  Now, I can see why Bush would muddy the waters with lies and distortions -- after all, he bad-mouthed the economy back in late 2000 and into early 2001 so as to be certain to get his non-stimulative tax gimmes passed through congress.  Of course, he has a pattern of lying about things -- Iraq being an example.

If one really wishes to do what is right for America and what is right for SS, we should wait until the Bush's term expires.  The task of reforming SS requires a leader of integrity and honesty, and that ain't George W Bush.

http://www.ssa.gov/OACT/solvency/index.html

You will be able to find all of solvency memos that Steve Goss at SSA has published at the above link.    

The mere luck of a beginner!