Monday, January 10, 2005

Has Barron’s been reading this blog?

It seems that way, as last week’s editorial about Social Security could have been put together from items posted right here...
...Opponents of privatization have started accusing the responsible side of being irresponsible, of trying to play accounting games to hide the multi-trillion-dollar borrowing that would be necessary to pay accumulated Social Security promises while also allowing workers to divert some of their Social Security taxes into private savings accounts.

Their accusation is true; it is an accounting game and we would thereby ignore a lot of relatively short-term borrowing. The good reason: Borrowing today gets us out from under much bigger liabilities in the future. The net effect is in the direction of fiscal sanity.
Prefunding Social Security obligations today will be a lot easier than borrowing or taxing to fund them 30 years from now when the deficit is headed to 20% of GDP, as noted previously. As was also noted, when General Motors borrowed last year to fund its pension obligations in just this manner, but on less favorable terms, it was praised. Only with Social Security is this claimed to be such a bad idea.

Unless, that is, one doesn't really believe that the government intends to pay everything that it has promised to baby boomers. Do you? Do certain economists, such as Peter Orszag of the Brookings Institution? ...

Orszag said that it could increase the long-term national debt because there is a big difference between the full-faith-and-credit promise that backs the interest and principal payments on a U.S. Treasury bond and the Congress-can-change-it-anytime promise that backs the payment of future Social Security benefits.

"Frankly, there's a lot more flexibility for the government to adjust future benefits than there is for it to negotiate publicly held debt," he said.
Of course, funding Social Security obligations can increase them only if the government actually is planning not to meet them otherwise -- a unique argument coming from Democrats.

But this is indeed the argument Orszag and his co-authors make, as they warn that private accounts will cause the government to become "stuck with" (their words) paying the benefits it has promised to pay. We noted their worries.

That's real progress toward a realistic appraisal of any promise to save Social Security as it is today. Social Security, as it is today, includes unfunded liabilities with a present value of $9 trillion to $12 trillion. Anyone who promises to save Social Security without changing taxes or benefits is kidding himself, or lying outright, or planning to let his successors borrow big-time. We prefer realism, truth-telling and acknowledging our present debt to Social Security beneficiaries.

Opponents of change are gradually acknowledging other truths: Social Security is "just a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline," as Princeton economist Paul Krugman put it recently.

We'd like to see him go on a national tour to tell that to the millions of Americans who believe it's an insurance program and that they have paid for their benefits. For good measure, he should explain to young workers that if the dedicated tax is insufficient, it should be raised.

If Krugman and his ilk were in charge they would be raising a lot of taxes over the next 35 years or so: The U.S. government's projected spending in 2040 exceeds its projected revenues by about 20% of projected GDP.
Last year’s deficit including accrued entitlement liabilities -- which weren’t counted in the "official" deficit of $412 billion -- was by the Treasury’s own measure $11.1 trillion. Most of that being Medicare, which is totally out of control, but a good $810 billion being Social Security.

For perspective, personal income tax collections were $811 billion in 2004, while adding corporate income taxes ran total income tax collections up to $993 billion. [CBO]

So just to stay even with the past year’s increase in the unfunded liability for future Social Security benefits would have required a 100% increase in personal income taxes, or an increase of more than 80% in all income taxes (with the proceeds actually being "saved" somewhere for future use – as the Social Security trust fund certainly does not do).

And no, the Bush tax cuts are not primarily to blame. The reason for the imbalance is largely a Medicare program consuming 7% of GDP, Social Security consuming 6%, the federal share of Medicaid taking more than 2% of GDP and the recent tax cuts bringing up the rear at about 2% of GDP and only if they are extended and not rescinded or reformed.

Another Princeton economist, former Federal Reserve Vice Chairman Alan Blinder, makes an argument against private accounts that bumps right up against the president's vision of the Ownership Society: "Social Security would be neither social nor provide security," he said last month. "This would be a piece of a program to expose people to more and more risk."…

No one lives without risk, except in his imagination. In the current system, for example, few recognize that they are assuming the risk of dying before they can collect benefits equal to all the taxes they put in and a decent return. People with shorter life expectancies -- African-Americans, for instance -- are exposed to this risk instead of market risk, even though market risk is a lot easier to deal with.

Blinder disagrees. Despite the existence of thousands of mutual funds, some of which actually do give the investor an even break, this economist equates the stock exchange with the casino: "There are millions of Americans who have no desire and no ability to gamble on the financial markets," he said...
Yet Blinder and all those who object to the risk of loss in financial markets are mute about the certainty of loss today’s workers will suffer from the status quo.

The Social Security actuaries say that among those who entered the labor market 1994, and so are around age 30 today, average-wage individual workers will receive back from Social Security 15% less than they contribute to it, high-wage individuals will get as little as 50% back –- and even the poor low-wage individual will receive back 2% less than he contributed.

And even these returns are 30% underfunded, so if Social Security’s funding remains "paygo" then by the laws of arithmetic the low-wage individual worker will take loss exceeding 30%, the average-wage one a loss of about 40%, and the high wage one a loss of 65%. [There will be more data on this in a future post.]

Blinder (feel free to substitute Krugman, Kinsley, etc.) while being so concerned about the risk that losses may be suffered by Social Security participants in private accounts, somehow fails to mention this "risk" of loss facing them in the status quo.

Though perhaps that's because it's not a risk but a certainty. Yes, markets are risky, but it's very hard to come up with a diversified portfolio of investments that poses a real risk of loss over a 40-year investment period. To guarantee such a loss takes a government.