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On Social Security Reform: Spearing the Beast

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posted on Feb, 9 2005 @ 12:12 PM
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Social Security reform to BushCo. basically means wiping out FDR's New Deal policies. America, if this happens, the masses will suffer. BigTime. I'm no socialist, but I am definitely opposed to this privatization crap. It's a sham. Don't fall for it.



Spearing the Beast
By Paul Krugman
The New York Times

Tuesday 08 February 2005

President Bush isn't trying to reform Social Security. He isn't even trying to "partially privatize" it. His plan is, in essence, to dismantle the program, replacing it with a system that may be social but doesn't provide security. And the goal, as with his tax cuts, is to undermine the legacy of Franklin Roosevelt.

Why do I say that the Bush plan would dismantle Social Security Because for Americans who entered the work force after the plan went into effect and who chose to open private accounts, guaranteed benefits - income you receive after retirement even if everything else goes wrong - would be nearly eliminated.
www.truthout.org...




posted on Feb, 9 2005 @ 12:20 PM
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The GOP was once the party of fiscal conservatism. They're now acting as if they've come down with altzheimer's. Burst the budget. Screw the poor.



Budget tight, deficit high

Tue Feb 8, 9:41 AM ET

Bush's $2.5 trillion plan would cut 150 programs. Other costs grow.

By Peter Grier and Liz Marlantes, Staff writers of The Christian Science Monitor

WASHINGTON - President Bush (news - web sites)'s just-released $2.57 trillion 2006 budget is noteworthy for what it includes and for what it leaves out.
story.news.yahoo.com.../csm/20050208/ts_csm/abudget



posted on Feb, 10 2005 @ 07:37 AM
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Here are a couple more articles on Bush's Social Security reform.

If Bush gets his changes passed, a lot of people - especially the young - are going to be affected. A friend was explaining to me yesterday evening what a scam this whole thing is. Where's the concern?

I guess when you grow up fat and happy in the USA, folks wrongly assume nothing bad will ever happen.


Our economy's heading for a train wreck (for various reasons). There's no way I'm going for this privatization crap. In the end, the only people who will gain from this will be the robber barrons, as we used to call them.



The Republican Dictionary, IV
02/08/2005 @ 4:42pm
E-mail this Post
In Bush's State of the Union address, he mentioned personal accounts seven times but private accounts zero times, which is interesting because only a few months ago he was using both terms interchangeably. But fear not, this was no mistake. The Republicans tested the phrase private accounts and found public support was much lower than when the same, exact, identical concept was called personal accounts. (Personally, I like caring accounts, but they didn't ask me.)

So the White House and its paid spin doctors, many of whom play journalists on TV, have taken to the airwaves to push the phrase personal accounts and chastise anyone in the media who employs the banished words to characterize ther Administration's Social Security agenda. Proof, if more was needed, that language is power and debates are won or lost based on definitions.

But here is the really funny thing about the personal/private accounts debate. Not only are they not personal accounts, they're not private accounts either. They are in fact US government loans. (Bear with me now, because this will only hurt for a moment.) You see, your payroll taxes will still be used to cover the benefits of current retirees, but under Bush's scheme the government will place a certain "diverted" amount into an account in your name. It sounds like a personal retirement account, but it's not. It's a loan. Because if your account does really well (above 3 percent), when you retire the government will deduct the money it lent you (plus 3 percent interest) from your monthly Social Security check leaving you with almost the same amount you would have received under the current system. If your account does really poorly (below 3 percent), you are out of luck. According to Congressional Budget Office, the expected average return will be 3.3 percent, so the net gain will be zero.
www.thenation.com...


You gotta love this one.. Bush thinks its 'uniquely American' to work THREE jobs. Talk about out of touch! I've never heard anything more idiotic than that. Uniquely American? I'm sure all those working poor parents out there struggling to make ends meet on their two and three jobs just love being uniquely American!




Bush: Holding Three Jobs 'Uniquely American'

Drudge Report | February 9 2005

Last Friday when promoting social security reform with 'regular' citizens in Omaha, Nebraska, President Bush walked into an awkward unscripted moment in which he stated that carrying three jobs at a time is 'uniquely American.'

While talking with audience participants, the president met Mary Mornin, a woman in her late fifties who told the president she was a divorced mother of three, including a 'mentally challenged' son.

The President comforted Mornin on the security of social security stating that 'the promises made will be kept by the government.'

But without prompting Mornin began to elaborate on her life circumstances.

Begin transcript:

MS. MORNIN: That's good, because I work three jobs and I feel like I contribute.

THE PRESIDENT: You work three jobs?

MS. MORNIN: Three jobs, yes.

THE PRESIDENT: Uniquely American, isn't it? I mean, that is fantastic that you're doing that. (Applause.) Get any sleep? (Laughter.)
prisonplanet.com...



posted on Feb, 10 2005 @ 11:15 AM
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Ok, so no one is biting. I guess the issue is too boring and/or complex for the layman. Understandable. I will still keep compiling info. on this, however. It is of vital importance to ALL Americans. Please look into it - here - and elsewhere.



Huh? Bush Explains How
His Plan Will Protect
Social Security
Salon.com
2-10-5

The Bush administration concedes that the president's plan for private investment accounts won't do anything to improve the financial health of the Social Security system. The plan will have a "net neutral effect," the administration says, meaning that, whatever Washington does with Bush's proposal, it will have to come up with some other way to "save" Social Security. Does the president understand that? You be the judge.

As his Social Security roadshow pulled into Tampa, Fla., over the weekend, Bush was asked how his plan would ensure that Social Security won't run out of money down the road. Here, straight from the White House Web site, is the president's answer in its entirety:

"Because the -- all which is on the table begins to address the big cost drivers. For example, how benefits are calculate, for example, is on the table; whether or not benefits rise based upon wage increases or price increases. There's a series of parts of the formula that are being considered. And when you couple that, those different cost drivers, affecting those -- changing those with personal accounts, the idea is to get what has been promised more likely to be -- or closer delivered to what has been promised.
www.rense.com...




Bush's Plan to Loot Social Security

By Norman D. Livergood

George W. Bush is telling us that Social Security is in trouble NOW. And you can believe everything he tells you--right? The Bush junta and Wall Streeters are peddling the Big Lie that Social Security is inevitably going bust.

It is not! The Social Security System (SSS) runs at a surplus of $100-$120 billion annually and will continue to do so throughout the twenty-first century! THIS IS WHY THE BUSH JUNTA WANTS TO LOOT SOCIAL SECURITY--IT'S WHERE THE BIG MONEY IS!
www.new-enlightenment.com...



posted on Feb, 10 2005 @ 04:24 PM
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I always said that bush does not give a BS about SS down the line what he wants is the budget to start the reform that he call the privatization for the benefit of the American people.

It's all about profits, that initial sum for the budget will be that last legacy and give away to his daddy and friends investment firm before been given away for individual accounts, the profits for any investment firm will be any investors dream.

But us the American people will never see a penny of those profits because we are not part of the elite.

Obviously the defense budget is not enough anymore now they want the SS budget.



posted on Feb, 10 2005 @ 04:55 PM
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EastCoastKid,

FDR's new deal programs are very debatable in some economic circles to have helped the U.S. during the depression and afterwards. In fact, some economists have argued that his policies extended America's time in the slump. They will argue (and relatively well) that it was only WWII that brought America out of its great depression. With that said, what Bush wants to reform is actually a bit different from FDR's initial policies anyway:



Q4: Is it true that Social Security was originally just a retirement program?

A: Yes. Under the 1935 law, what we now think of as Social Security only paid retirement benefits to the primary worker. A 1939 change in the law added survivors benefits and benefits for the retiree's spouse and children. In 1956 disability benefits were added.


www.ssa.gov...

The party of fiscal conservatism is well known in massive spending during war time -- as well as most other partys -- claiming to be fiscal conservative or not. It's well in the republican platform to cut government spending on social programs while at the same time supporting free-market solutions. Predictions of his budget should be a happy thing to those worry about the deficit in relation to the GDP:




All things being equal, I would like to see the government rid itself of social security all together.



posted on Feb, 10 2005 @ 08:14 PM
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So, ECK, are you saying that SS is fine and there is no problem? Are you saying that it's not a pyramid scheme, and that for people my age (40s) there will actually be something there for my retirement?

Should we just do nothing? Why, if the country if headed for a train wreck as you say, should I be comfortable with letting them hold onto my money for me? Shouldn't I be wanting to get it away from the government as quickly as possible so they won't spend it?



posted on Feb, 11 2005 @ 09:59 AM
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Originally posted by radardog
All things being equal, I would like to see the government rid itself of social security all together.


Radardog,
I appreciate your comments and the data you provided. You and I will have to agree to disagree. My position comes from personal experience with social security.

My father, a Republican, railed against the social security system. He always said it was the biggest scam ever foisted upon the American people. He was very intelligent and forward thinking. Unfortunately, he could not foresee his future and the future of his children. He came from a good, solid family who taught him to be self reliant, fiscally responsible and hard-working. He earned degrees in both history and political science and invested his money wisely.

He died when I was five. My brother was two months shy of being born. Dad was 25. He set us up financially. I'm constantly amazed (now being 10 yrs older than he when he passed) at how well he set us up. We had property, investments and plenty of money from his insurance policy.

Now the problem.. Several years later, my mother remarried. She believed this man to be the man she would spend the rest of her life with. She trusted him completely and what was hers (OURS) became his. Over time, because of her love-induced blindness and loyalty, she allowed him to blow everything my father left for us. And this wasn't even some other side of the tracks guy! This was a guy who came from an influencial family, who got hooked on coke and decided he just wasn't gonna work anymore. I guess he was special.


By the time I was in the 11th or 12th grade, he had spent just about all of it and was rarely home. He was too busy visiting his favorite haunts down in Florida or wherever those beaches were. My mom was left holding the bag and having to pay ALL the bills with what little she had left. It was hard on her; but she had one thing in her favor.

Because of dad's death, my brother and I each received a social security check. That money, that we shouldn't have needed - but wound up needing - kept a roof over our heads, food on the table and our mother at home to take care of us. Dad never foresaw us ever being in need of anything. And, if things would have gone the way we had all hoped, things would have turned out much differently. In retrospect, though, it taught me something about social security and the merits of it. My situation gave me compassion for others who suffer and struggle. Had my dad lived on, I probably would be a lot more insensitive to the plight of others.

Now before you accuse me of being some angry, big government liberal, let me make one more comment about cutting programs and social security. I supported Reagan - even through his cutting one benefit that impacted me specifically. Back when he was trying to cut spending (I think in his first term), he decided to cut the benefit that allowed children of deceased parent(s) to receive their social security check while they were in college and until they graduated. The cut-off age for support became 18. I never bitched about that because I thought it was reasonable. Spending discipline is never easy and you have to cut something. Besides that, an 18 year old can get out there and work, join the military or go to college.

Maybe I thought it was fair b/c I was still able to go to college with no trouble. Maybe if I had not won those athletic scholarships and had trust funds (from my dad's family) I would have felt differently. Who knows? Scholarships and trustfunds aside, I wound up quitting - not being ready for college - and going into the Army. In the Army I had plenty of time to think about what I wanted to be when I grew up and by the time I got out, I was financially self-sufficient.

To this day, I do not disagree with Reagan's decision to cut that program. But I do disagree with my father's opinon of social security. I've often wondered just what his opinion of it would be now, knowing how it all played out; knowing that it literally took care of his kids b/c of my mom's bad decision making. Would he now see the benefit? I'd like to think so.

With regard to this whole Bush plan to privatize the SS system, I say leave me out of it. There's no way I'd be willing to bet even a fraction of my future security on what I've heard so far. At best, those who join will break even, at worse, you'll lose what little social security would have provided. Here's an article on it.



How Dumb Does George Really Think We Are?


Commentary from The Laura Flanders Show , February 5, 2005

Oh really. How dumb does George really think we are? Does the President really think we'll fall for it a second time?

Here's what I want you to do: for every time W says the words "social security" I want you to say to yourself "weapons of mass destruction." Social Security=WMD. Aluminum tubes=trust fund bankruptcy.

The Bush team are rolling the same product out again only this time it's not Yellow Cake in Niger that they're using to lie to the American people, it's the wackiest possible sometime-a-hundred years from now estimates of the Social Security Trust fund's solvency.

There's that magic word again: security. "This is just a better deal," says W. "The goal is greater retirement security."

Well, the Iraq invasion plan was all about security too - and there's been only one great undisputed beneficiary - or maybe two: First, those shadowy terrorist networks Bush promised to fight. Second, Iran. Iraqis may finally seen some gains from the elections they foisted on their occupiers - but Iran's mullah's are the one's who've have managed to increase their influence at no price paid in blood. All Gain no Pain. How do you say in Farsi, "GW thank you very much."
www.commondreams.org...



posted on Feb, 11 2005 @ 10:53 AM
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The new tax reform is geared to target the younger generation if you are in your 40s you are out of luck.

If bush tried to target our age group we are going to be the ones to lose the most until the program starts working and that if the program works and our economy is good enough but bush does not stop spending, he will bring our country to bankruptcy trying to fix the deficit.

You can not keep borrowing to fix a deficit and gambling on the future.



posted on Feb, 11 2005 @ 11:21 AM
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Originally posted by marg6043
You can not keep borrowing to fix a deficit and gambling on the future.


Never borrow from Peter to pay Paul.. so the saying goes.

I don't trust this stock market at all. And I trust this robber barron administration even less.

Remember how they told you (with a straight face) that Saddam had Weapons of Mass Destruction, that they knew where they were and that they were gonna get 'em?

Believe these people at your peril.



posted on Feb, 11 2005 @ 11:22 AM
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I think privatizing social security is a HUGE mistake. Why? Correct me if I'm wrong but doesn't Bush want us to put our social security into the stock market? Bad idea if you ask me. The stock market could crash at any time. Let's face it. It's not doing real well either right now. It's almost as if the government wants us to go broke and be poor.

[edit on 11-2-2005 by mrmulder]



posted on Feb, 11 2005 @ 11:36 AM
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Originally posted by mrmulder
It's almost as if the government wants us to go broke and be poor.


As crazy as it sounds, I've heard plenty of reasonable, knowledgeable people make that claim. Think about that unthinkable for just a moment.. For a dictatorship, it would be much easier to control the population if they were desperate and starving, wouldn't it? I betcha if that happened, they wouldn't need to start a draft. Folks would join out of the sheer necessity of feeding their families. That's just one aspect to consider..



posted on Feb, 13 2005 @ 12:40 AM
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Mr. Mulder, EastCoastKid:

You guys shouldn't be that fearful of the stock market. Unlike the early 1900's, if the stockmarket looks to be spiraling downards, the stock exchanges can literally stop the markets. Moreover, Bush gives you the option to invest in the stock market. The markets are hardly doing poorly, as seen as by this macro-analysis of 2004:



source: www.nyse.com


EastCoastKid,

I am sorry to hear about your situation; however, I am not convinced SS would have been your family's only alternative. Had there not been SS to help you and your family out, there could have been countless other freelance charities that might have sprung up where SS is today. The possibilities are endless.



posted on Feb, 13 2005 @ 08:33 AM
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As widely reported by the press, a partial privatization of Social Security via the creation of private accounts is one of the top policy priorities of the Bush II administration.
But when you carefully look at the facts, it becomes clear that the proposed partial Social Security privatization is literally a Con Man Smoke-and-Mirrors Shell Game that - in the form it has been proposed - will not lead to any of the alleged benefits argued by its supporters. It is amazing the amount of misinformation that one reads about social security privatization; apologists argue that:
- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.
- Privatization would increase national savings and the accumulation of capital and thus lead to higher long run income and growth.
- Privatization would lead workers to be able to invest into higher return equities rather than the low return public debt of the current system.
- Privatization would be self-financing and have no long run transition costs as you reduce the large future implicit liabilities of the current system, in spite of the fact that you are creating large transtion costs via privatization. So, it is a free lunch.

Each of those statements is incorrect once you do the math; of course, as Alan Murray has argued in the WSJ you may need a "Ph.D. in accounting" to make sense of the non-sense that is been spewed daily on the topic of social security privatization. But let me try to put in simple, if a bit complex terms, what are the tradeoffs at stake when you consider privatization. To clarify these myths, we need a few points of clarity . (For more technical details see my longer 1997 paper on Social Security Privatization and Reform)

First of all, is the current pay-as-you-go (PAYGO) Social Security system insolvent or bankrupt? The answer to this question is more complex than ideological sound bites.

It is correct that the current system faces serious long-term deficits. The current system is one of defined benefits, not defined contributions: and it is pay-as-you-go as the contribution of the current young workers go to pay the benefits of old workers who have retired. But this PAYGO system is currently not fully solvent as the aging of the baby boomers generation implies that the current contributions and the growing Social Security Trust Fund will not be able to fully pay the promised benefits in the current system after 2042. Estimates suggest that these unfunded liabilities of the current system are about $10.4 trillion dollars. However, these figures need to be put into context. For one thing, this $10.4 trillion hole over the infinite horizon is $3.7 trillion in present value terms over the next 75 years. Moreover, the entire gap comes from cash flow deficits after 2042; until then there are no deficits in the current system.

At the moment, Social Security is running a significant cash flow surplus about $180 billion in 2005. About half of the $180 billion comes from taking in more in payroll contribution than it pays out in benefits to current retirees; the rest comes from the interest on its holdings of government bonds, a large stock that is increasing over time as the trust fund is been built up to partially finance the benefits of the retiring baby boomers. Official estimates imply that the cash flow surplus will be $280 billion and the assets of the trust fund equal to of $3.6 trillion in 2012. Around 2018, social security benefits will start exceeding revenues. But given the current large build-up of the Trust Fund, the current system will have the funds to pay all expected benefits until 2042. Thus, the problems with Social Security, from a cash flow point of view do not start until 2042.
Even after 2042, Social Security is not "bankrupt": at that time, its revenues would still be able to cover about 75% of the promised benefits under current law. The fraction of promised benefits that can be paid then gradually falls from 75% to 70% in 2080. Thus, even after the Trust Fund is exhausted, a significant fraction of the benefits can be paid.

Of course, we cannot wait until 2042 to fix the problem of Social Security and restore its long-run actuarial solvency. But reforming the curent system, without any privatization, is a totally manageable problem.

Resolving this unfunded liability has a cost of only about 1.89% of taxable payroll if action is taken today to fix the hole in the current system. In other terms, if we start today and increase payroll contributions (and/or reduce future benefits for current young workers and/or change the retirement age) we need only a permanent adjustment equal increasing the payroll tax by 1.89% (i.e. an amount that is about 1% of GDP) to ensure that the current PAYGO system is solvent for the next 75 years, i.e. the long run horizon considered by the Social Security trustees). Thus, $10 trillion problem ($3.7 for the next 75 years) is not as large or scary if we start acting today to fix the current system. It is totally manageable.

This means that, rather than messing with social security and privatizing it, there are more sensible and reasonable ways to reform it in the context of the current pay-as-you-go system. Specifically, authors such as Diamond and Orszag have proposed a combination of reducing modestly benefits and increasing modestly the payroll tax that fully fixes the $10 trillion hole of unfunded liabilities of the current PAYGO system and makes it solvent forever. And independent estimates by the Social Security Administration have scored this Diamond-Orszag plan and have shown that, indeed, it restores the 75 year horizon solvency of the current regime. Other proposals combine a reduction in benefits and an increase in payroll taxes with an increase in the retirement age to deliver a similar reform of the current PAYGO system. But they all can achieve solvency of the PAYGO system with modest and manageable reforms.


Second, the administration plan to start partly privatizing Social Security would create a large further hole in the budget balance and sharply increase the budget deficit. Specifically, privatizing social security has a massive transitional fiscal cost: if the young workers contribute less to social security when part of their payroll tax is cut and goes instead to private accounts, you still need to pay for the benefits of the current old, retired and soon to be retired, who have earned their benefits via contributons while working.

So, privatizing social security increases the budget deficit by a large amount until all those folks retire and eventually die (a process that takes several decades). Official estimates by the CBO and other reputable independent sources imply that introducing private accounts (a diversion of part of the current payroll tax to private accounts as in one of the proposals in the Bush Social Security Commission) will increase the cumulative budget deficit by about $114 billion in the first year, almost $200 billion a year after ten years and over $350 billion a year in twenty years (i.e. by over $5 trillion over the next three decades including the interest costs of the additional debt). The size of the transition cost is thus massive by any measure! And these are the transition cost with only a partial Social Security privatization: if Social Security were to be fully privatized (all payroll taxes diverted to private accounts) the costs would be a multiple of $5 trillion.

Third, a social security privatization financed by debt (increased deficits) is, as even the strongest supporters of privatization like Larry Kotlikoff admit, only a shell game that does not lead to the benefit of increased national savings and capital accumulation in the long run. It is literally just a farce to privatize social security by issuing government debt as, in a macro general equilibrium set-up, the same government debt that is today being accumulated by the social security Trust Fund would have to be then accumulated by the young workers in the their private accounts, i.e young workers would not get the benefits of higher equities returns.

In other terms, those who argue that privatization would allow young workers in the new system to earn higher returns on equities rather than the miser returns of the current PAYGO system are totally misleading the economic facts.

To understand this crucial and subtle point, assume that you start from a fully solvent pay-as-you-go social security system where the contributions of the young are just enough to pay the benefits of the old (we will consider later what happens when a PAYGO system has unfunded implicit liabilities, as in the current regime). Then, there are three ways to privatize such a system and to pay for the transition costs:

1) issue debt that will be financed by future taxes on the young (curent workers) and future generations;

2) tax the current young/workers;

3) tax the current old/retirees.

As any graduate student of economics know, the first two financing options are equivalent and lead to a shell game privatization where national savings and capital accumulation remain unchanged and thus there are no - repeat none - higher returns or benefits for the current young workers in their private accounts. I.e. capital does not increase, income does not increase and the privatization, in the words of Kotlikoff (one of the strogest supporters of privatization), becomes a "shell game" with no benefits.

In other terms, only a privatization financed by a tax on the current old retirees (or a cut in their benefits) (i.e. option #3) leads to the increase in national savings, the increase in national investment and the higher long-run capital accumulation that provides the potential of higher benefits via the higher (relative to bonds) equity returns on the larger stock of capital; i.e. if the stock of capital does not increase, current and future workers cannot earn the higher return provided by equities as the capital stock is unchanged. You need an increase in the stock of capital (relative to the pre-privatization benchmark) to allow workers to enjoy those higher returns.

In other terms, the creation of the PAYGO Social Security system caused an initial reduction in national savings as the first generations of beneficiaries did not contribute to the system in amounts equal to the benefits that they received (i.e. they were subsidized by the first generations of fully contributing workers). This is what is referred to in the literature as the "legacy debt" problem in the current system. However, this initial fall in national savings and in capital accumulation can now be undone only if a generation of retirees pays for the transition costs, by not receiving the benefits that it earned while young and contributing to the system. But this solution, the only one that increases national savings and the stock of capital in the economy, is political suicide for any government to propose. No government would be able to privatize social security by "screwing" retirees who earned their benefits while young and contributing all their lives to the system.

Thus, while privatization #3 (tax the current old and/or cut their benefits) is the only right way to privatize if one wants an increase in the capital stock in the economy and higher returns on equities for future generations, this is also the one form of privatization that is politically impossible to do because it amounts to having the current old lose most of their acquired benefits.

Thus, privatization becomes a shell game when it is instead financed by a tax on the current young/workers or by issuance of government debt.

Why is a shell game to privatize with debt or a tax on the current young/workers? If privatization is financed by a tax on the young (income or payroll tax), it is not a true privatization that would reduce the distortions of the payroll tax and increase total national savings and capital accumulation. In fact, the part of the payroll tax that is diverted to private accounts represents a reduction in public savings and an increase in private savings. But then, the increased labor tax that finances the transition costs reduces private savings and increases public savings. At the end, national savings are totally unchanged. So, the current young workers do not get any benefit at all from this type of privatization. They are still forced to save in the form of private accounts and, on top of that, they are paying an extra tax equal to the amount of the diverted payroll tax to pay for the transition costs, i.e. to pay for the benefits of the current old. So, you get a "shell game": total national savings are unchanged and total investment is unchanged. So, there is no extra capital accumulation and no higher equities returns on a higher capital stock for the young from the privatization, as the stock of capital has not changed relative to the pre-privatization baseline.

Alternatively, financing the privatization with debt is exactly economically equivalent to the previous "shell game" of financing it with a tax on the young, i.e. again it has no effect on national savings and capital accumulation. This is why: if you finance the privatization with debt, the extra debt has to be serviced over time. If the servicing of this debt is done by taxing the young (you do not tax the old as they are retired and you do not want to reduce their earned social security benefits), the cost of servicing this debt is still the $5 trillion dollar transition cost. So, issuing debt to finance the transition still implies a tax hike on the current generation of young workers or future generations of young workers (if the debt cost is spread over many generations). It is then easy to show mathematically (ok, not so easy but any advanced undergraduate student in economics can do that) that this debt financing followed by future tax hike solution to the transition costs implies that the level of national savings is unchanged after the privatization: the current and future young worker generations will, in equilibrium, have to invest their private accounts in the extra public debt and therefore the privatization becomes again a big Shell Game. I.e. there is no increase national savings or capital accumulation and therefore there are no higher equity returns to be made: i.e. after the privatization the young, as before, will earn the same low returns on the government bonds as in the current system.

So, in simple words, privatization becomes the Mother of all Financial Scams once you consider the transition costs and who is paying them.

As the many intellectually honest academic supporters of privatization - rather than the bunch of dishonest Con Man politicians in Washington - well know, the only way for privatization to increase savings and capital and thus provide higher equity returns for current and future generations is to ensure that the current old generation of retirees - not the current young workers - bears most of the burden of the privatization.

In one scheme supported by Larry Kotlikoff, the transition cost of a full privatization are financed by a new consumption tax that, by definition, hits harder current retirees - that are only consuming rather than saving - rather than the current young workers who have positive savings. Even that scheme is enormously expensive and politically a "mission impossible" to achieve: to achieve a full privatization, Kotlikoff would impose a national sales tax at the rate of 10%, falling to about 2%,after about 40 years. Now, put to a vote in Congress a Social Security privatization that is financed by a 10% new consumption tax and guess how many Republican Congress-folks would vote for that: most likely not a single one!


Fourth, what about the $10 trillion? Don't they imply that the current system is bankrupt and that current workers will not get their benefits when they retire?

It is true there is a 10 trillion dollar implicit liability in the current not fully funded PAYGO system but, as discussed above, the problem is not as scary as it is often made: resolving this unfunded liability has a cost of only about 1% of GDP (in terms of permanent increases in payroll revenues or reduction in benefits) if action is taken now. Indeed, Diamond and Orszag have proposed: a combination of reducing modestly benefits and increasing modestly the payroll tax that fully fixes the $10 trillion of unfunded liabilities of the current PAYGO Social Security system and makes it solvent forever.

More importantly, Con Game apologists for privatization regularly willingly confuse the implicit liabilities of the current not-fully-funded pay-as-you-go system with the transition costs of privatizing the current system.

To clarify this most important point, suppose that the unfunded liabilities of the current PAYGO system are $10 trillion dollars. Then, in order to save the current system, even without privatization, you need to address this large implicit hole. As discussed above, there are a few options here: either reduce the benefits of the current young workers and/or increase the payroll tax for such workers and/or increase the retirement age. So, this only means that, regardless of privatization, you will need to fix the current regime to make it viable in the long run. You need to do that regardless of any debate on privatization, i.e. even if you try to privatize you need to fill that hole.

But the crucial and central problem is that, once you have fixed that unfunded implicit debt problem you are still left, if you also want to partially or fully privatize the current Social Security system, with the additonal transition costs of having to pay somehow for the benefits of the old while you are diverting the contributions of the young to the private accounts.

Suppose that these transition costs are another $5 trillion over the next few decades. Then, you can fix social security without privatization and get rid of the current imbalance in the system ($10 trillion). But, if then you also want to partially privatize the system, you need to find a way to fund the extra $5 trillion of transition costs.

In other terms, as academics have known for a while, you need to keep separate two concepts in the debate about social security privatization: pure "privatization" in a system that is already fully funded (i.e. without implicit liabilities) from "prefunding" that refers to filling up the gap of the unfunded liabilities of the curent PAYGO system. "Privatization" and "Prefunding" are completely separate concepts and mixing them together, as politicians in Washington are doing now, leads to shell games and accounting scams. "Prefunding" does not imply transition costs as you fix the current unfunded gap; "privatization" instead creates additional large transition costs and such costs are massive. You can fix social security with "prefunding"; you do not need to do
"privatization" to do that. And doing "privatization" may fix the "prefunding" problem (if it is done right) but it creates the transition costs that are unique to "privatization".


Specifically, arguing that privatization reduces the liabilities coming from the promise of future benefits for the current young (and it is thus self-financing over the long run)is false as it confuses the two problems ("privatization" and "prefunding") to give you a Con Man Three Cards Monte game privatization. As in the Three Card Monte con game, it bamboozles and fools the hapless current worker in believing that the alleged higher returns on stocks will more than compensate the losses from having two losses: reduced benefits to fill the unfunded hole ("prefunding") and the extra current and future tax cost of paying for the transition to the privatized new system ( thisis solely the effect of "privatization"). It is a total Smoke and Mirrors game. Why?

The reason is that you can eliminate that liability coming from a not fully funded PAYGO regime ("prefunding") even without a social security privatization by raising the contributions or reducing the benefits of the current young workers. Thus, the current young workers will have to bear that unfunded liability cost (prefunding) regardless of privatization. However, the elimination of this future liability does not then allow you to finance at the same time the transition costs to a private regime. To do that you need to find an additional $5 trillion of real resources.

The two issues are separate and mixing them together confuses the true issue like in a typical Three Cards Monte game: it leads privatization con men to misleadingly pretend that the privatization can fix both the future unfunded liability (prefunding) and the transition costs and still provide higher benefits to the young. That is utter economic non-sense and dishonest to claim.

Privatization may fix the former problem (if benefits for the current young workers are sharply cut) but it creates and leaves open the other one. If you then finance the transition costs with debt (as the Bush administration is planning to do), the positive effects on national savings and investment do not materialize as the current young - as in equilibrium someone who is not a retiree has to - will need to buy with their private accounts the extra government debt created by the transition costs (or pay higher taxes upfront for it if debt is not issued, that is the same thing in NPV terms as issuing debt and raising taxes later).

So, the private accounts do not lead to greater national savings nor they lead to more investment in stocks and capital: the whole privatization ends up being a different way for those private accounts to purchase the same government debt that is now purchased by the current PAYGO social security system. So, social security privatization becomes again a pure "shell game" with no real effect on the economy.

Arguing that privatization can solve the $10 problem (prefunding) and also solve the $5 trillion transition problem is a Smoke and Mirrors game of confusing the issues. In any privatization scheme, as soon as you decide to privatize, you create a $5 trillion problem (transition costs) that did not exist before. Then, if the part of the privatization that eliminates the implicit current debt (prefunding) is done right (i.e., a sharp cut in the benefits for the current young) you may be able to eliminate the initial $10 trillion unfunded problem.

But, in any privatization scheme, you cannot solve the $10 trillion problem without creating at the same time a $5 trillion problem unless you cut the benefits of the current workers twice: once by $10 trillion to fix the prefunding problem and another time by another $5 trillion to pay for the transition costs. But politically, no one would propose that the benefits of the current workers would be reduced twice, to fix prefunding and to pay for the transition. If anything, privatization may not even fix the prefunding problem as some of the proposed private account schemes - to make privatization politically "sweet" - do not even reduce the current benefits to eliminate fully the $10 trillion prefunding problem.


And the argument that the higher return on equities in the private accounts will square the circle is, again, accounting-wise and economic-wise false. In fact, any scheme - i.e. either fixing the current PAYGO system or privatizing - requires reducing the benefits (or increasing the contributions)of the current young (prefunding); so, the two schemes are conceptually equivalent in that dimension. And either solution has not effect (or has the same effect) on national savings.

But, on top of fixing the $10 trillion problem, privatization creates an additional $5 trillion problem that is not created if you fix the current PAYGO system. And creating this additional $5 trillion problem means that national savings are unchanged (if you finance the transition with debt or with a tax on the current workers) and thus the current workers cannot be compensated (as incorrectly and falsely argued by supporters of privatization) for this tax cost by higher returns on their privatized accounts: since there is no increase in capital or capital accumulation, there are no greater amounts of equities on which to earn the higher returns. To earn the higher return on equities you need more capital in the economy and if there is not more capital after privatization, there is nowhere to earn those higher returns.

Indeed, as any economist well knows (as reported in the NYT today):

"To the extent that the transition is debt-financed, the ostensible macroeconomic benefits from individual accounts are undermined," said Peter Orszag, an economist at the Brookings Institution who has been critical of personal account plans. "In particular, you do not get an increase in national savings. It's engaging effectively in accounting gimmicks to make it look as if you're doing something when you're not."

So, privatization is not self financing. In a privatization scheme, directly or indirectly, the young still end up having to buy the same government bonds that are issued to finance the transition costs. So, they do not get, either in the short run or the long run, any benefit from the privatization.

Conclusion
It sounds all complicated, as the political accounting scams that are being pushed by ideologically-biased and intellectually dishonest supporters of privatization give the illusion - and it is totally an illusion - that privatization can get you higher returns as "you could invest in higher yielding equities than in lousy low return government bonds".

But the bigger scam is that, in the end, privatization leads workers to invest in the same bonds that they were investing in the current regime while, with privatization, some financial intermediary will now skim a hefty part of their return with fees for this smoke and mirrors scam (as the experience of Chile and the UK suggests). If workers have to end up to keep on earning the same low government bond rates, one may rationally rather want to keep the current system where at least the administration costs of social security are close to zero and there is no intermediary skimming your government bond returns.

Yes, Social Security needs to be fixed as it has serious long-run deficits (after 2042) while being fully cash-flow sound for the next 40 years. And modest changes amounting to a permanent 1% of GDP (a 1.89% change in payroll taxes and/or an appopriately similar reduction in benefits and/or increase in retirement age) can make the current PAYGO regime solvent forever. Privatization instead, as argued in detail above, will close the hole of the current regime (a $10 trillion problem over the infinite horizon and a $3.7 trillion problem over the next 75 year) by creating at least a new additional $5 trillion hole of transition costs. And it would not provide any benefits, in terms of long run higher returns on equities, to the current and future generations; so, it would not be self-financing.

And the recent pathetic attempt by Republicans in Congress to hide the transition costs by putting such costs off-budget or by using other accounting scams turns the privatization con game into a total farce. The Con Game is now turning into a Three-Card Monte game; in any honest capitalist financial system, such accounting crimes by a firm would get you in jail.

But the same ideologues who have just provided political immunity to Tom DeLay have no qualms to try to put the transition costs of privatization off-budget. These Congressional financial con artists have no shame whatsoever. But it is one thing to politically shelter a corrupt DeLay who is alleged to have scammed a few millions of political contributions and is now on the verge of criminal indictment. It is instead a much more colossal scandal to start a new $5 trillion scam that creates and shelters from the formal budget an additional budget hole of $5 trillion. From the same con artist folks that turned the 10-year future $5 trillion cumulative budget surplus of 2000 into a $3 trillion cumulative budget deficit in 2004, one could have not expected much fiscal discipline. But on top of the fiscal disaster that they have already inflicted on the nation with their reckless tax cuts, to add another $5 trillion of debt is a sheer form of financial criminality.

In any other capitalist system, the CEO concocting such an accounting scam - that surpasses those of Enron, Worldcom and Parmalat by an order of magnitude - would be fired and end up in jail. In our MBA presidency, the CEO would deserve impeachment for such financially criminal and reckless behavior that has created the biggest fiscal mess in the history of the nation.



posted on Feb, 13 2005 @ 06:10 PM
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Screw putting FICA withdrawals into the stockmarket. Just let people keep their money. Draw a line at an age and let these people and older get their benefits that they were promised. It's only right. Let everyone else plan for their own retirement. People in the United States have become far too dependant upon the federal government. I don't know about the rest of you, but to me, relying upon the federal government for one's retirement seems a tad bit ridiculous. Social Security is unconstitutional. No where in the Constitution is the federal government given the authority to establish and run such a program.

Whatever is done, something must be done soon....There is no money in the Social Security Trust Fund. It has been raided over and over again over many administrations. The S.S. Trust Fund does not contain tangible assets that can be "cashed in." This money has been replaced with government IOU's, which must be paid back by the federal government at some point in time. This will have to be done by either raising taxes or cutting benefits, neither of which is all too attractive........

I would like to see the current system scrapped altogether; however, if one wanted to save the current system, I think the only plausible way to do it would be to make serious cuts in other areas, and reallocate the money. Of course, this would probably only be a temporary fix, due to emerging demographic trends in the US--the population is becoming older and "grayer." When S.S. was first set up, it worked fine. Why? Because of the babyboom, there were more than enough workers to pay into the system, in order to take care of retirees. This is not the case anymore. People are having fewer children today than they did in the past....also, with advancements in medicine and technology, people are living longer.

A serious strain will be placed on the current system, due to the babyboomers retiring....It is somewhat ironic that the people who were responsible for the success of the system, will in the future place such a heavy burden on that system.....



posted on Feb, 14 2005 @ 02:47 PM
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Thank you for that outstanding analysis.
You get my vote for Way Above.

cryptorsa1001 said:



But the bigger scam is that, in the end, privatization leads workers to invest in the same bonds that they were investing in the current regime while, with privatization, some financial intermediary will now skim a hefty part of their return with fees for this smoke and mirrors scam (as the experience of Chile and the UK suggests). If workers have to end up to keep on earning the same low government bond rates, one may rationally rather want to keep the current system where at least the administration costs of social security are close to zero and there is no intermediary skimming your government bond returns.


That's the bottom line. Join privatization and PAY A MIDDLE MAN!

Brilliant. Just brilliant.



posted on Feb, 14 2005 @ 07:20 PM
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Originally posted by mrmulder
It's almost as if the government wants us to go broke and be poor.
[edit on 11-2-2005 by mrmulder]


funny, that......



posted on Feb, 14 2005 @ 08:31 PM
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Originally posted by EastCoastKid
Thank you for that outstanding analysis.
You get my vote for Way That's the bottom line. Join privatization and PAY A MIDDLE MAN!

Brilliant. Just brilliant.


But hey that is how profiteers in this country including Bush family father and friends do business, they are getting their coffers very full indeed when you have a member in an investment firm that served as a middle man, with a son in the white house, money is handle directly to them with not problems at all.

Middle man is everywhere to profit from tax payers.

But when it comes to find money for the needs of the American people all we get is bogus plans, empty promises and budgets cuts.

cryptorsa1001
Outstanding post.




posted on Feb, 15 2005 @ 02:47 PM
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MODS, please note that cryptorsa1001 was plagiarizing, and this can be evidenced by the article nearly verbatim seen at:

www.stern.nyu.edu...

Thank you.

[edit on 15-2-2005 by radardog]



posted on Feb, 15 2005 @ 03:41 PM
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Yep, yep, yep......at least put it in your own words.....or at least cite your source.




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