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Originally posted by radardog
MODS, please note that cryptorsa1001 was plagiarizing, and this can be evidenced by the article nearly verbatim seen at:
apologists argue that:
- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.
- 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.
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.
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.
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.
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.
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 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....
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.
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.
Suppose that these transition costs are another $5 trillion over the next few decades.
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.
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.
Originally posted by radardog
I wasn't saying anything about the article being invalid -- I just didn't care for the academic dishonesty. I however disagree; the article is off in many places.
Originally posted by radardogDoes anyone else feel screwed by that solution?