07-12-2004 20:37									#1
	Inventing a Crisis Support Apolyton, buy Civilization: The Boardgame

quote: Inventing a Crisis By PAUL KRUGMAN Published: December 7, 2004 Privatizing Social Security - replacing the current system, in whole or in part, with personal investment accounts - won't do anything to strengthen the system's finances. If anything, it will make things worse. Nonetheless, the politics of privatization depend crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it. I'll have a lot to say about all this when I return to my regular schedule in January. But right now it seems important to take a break from my break, and debunk the hype about a Social Security crisis. There's nothing strange or mysterious about how Social Security works: it's just a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline. Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire. The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem. But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year. Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come. It's true that the federal government as a whole faces a very large financial shortfall. That shortfall, however, has much more to do with tax cuts - cuts that Mr. Bush nonetheless insists on making permanent - than it does with Social Security. But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one. My favorite example of their three-card-monte logic goes like this: first, they insist that the Social Security system's current surplus and the trust fund it has been accumulating with that surplus are meaningless. Social Security, they say, isn't really an independent entity - it's just part of the federal government. If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice. But never mind: the same people who claim that Social Security isn't an independent entity when it runs surpluses also insist that late next decade, when the benefit payments start to exceed the payroll tax receipts, this will represent a crisis - you see, Social Security has its own dedicated financing, and therefore must stand on its own. There's no honest way anyone can hold both these positions, but very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success. For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it. E-mail: krugman@nytimes.com

http://www.nytimes.com/2004/12/07/o...l?oref=login&hp

Nice simple sumation of events.

	07-12-2004 20:41									#2
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And will be totally ignored.

	07-12-2004 21:54									#3
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There is one problem I see with this. The social security trust fund doesn't have any actual dollars in it. Long ago Congress spent all of the money and instead put in T-bills which are essentially IOUs. That means the trust fund that that Krugman is counting on to last until 2052 doesn't actually have any money in it and the only way to get money is for the government to borrow the money to pay the IOUs.

That means mammoth spending increases in 2012 or cuts in benifets.

	07-12-2004 22:05									#4
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I don't think Krugman is so ignorant as to assume that money is sitting there in a box. Anyway, we won't need massive spending increases unless the government decides to cut part of the payroll tax to pay for the retirement fund boondoggle, in which case we'll need to come up with 1.2 trillion dollars.

	07-12-2004 22:11									#5
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quote: Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052.

Che, Krugman's own rosy figures claim that outlays will exceed income for social security in 2012 and he is relying on the trust fund to cover that difference between 2012 and 2052. The problem is there is no trust fund the politicians already took every penny out of it and replaced it with IOUs. Thus starting in 2012 we must either cut some other programs, increase taxes, or decrease benifits.

The amount of money that must be come up with will increase every year until around 2035 when it is projected the number of boomers on social security will start to decline. Even so the system will stay in the red unless taxes are raised, other programs are cut, or benifits are reduced. We have a big budget problem here.

	07-12-2004 22:13									#6
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Does anyone know how likely it is for SS privatization to pass? I'm having a hard time believing that any Democrats will go over and there is bound to be some defection in the GOP.

	07-12-2004 22:15									#7
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quote: Originally posted by Oerdin Che, Krugman's own rosy figures claim that outlays will exceed income for social security in 2012 and he is relying on the trust fund to cover that difference between 2012 and 2052.

Those are the Congressional Budget Office's rosey figures. IIRC, before the Bush tax cuts, we weren't going to go negative until 2037.

	07-12-2004 22:16									#8
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So Krugman is correct: the Social Security System itself is not the problem- its that the past few admins have raided the pension fund to finance their ideas.

obviously then the problem is raiding the pansion fund- massive restructuring of the fund, which will be very constly itself, won't actually solve the problem at all, which is Krugman's point.

	07-12-2004 22:16									#9
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Bush knows a total privitization won't fly so he's proposing that 3% of everyone's SSI taxes be put into a private account. The problem is if you make 50k per year that 3% will add up to less then $100. It's hard to see the big returns Republicans are promising when most of the people will get a total of $2000 in capital spread out over a twenty year period.

Really it's a joke to throw a bone to the far right.

	07-12-2004 22:16									#10
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Given that, Che, perhaps the proper thread title is Creating a Crisis.

-Arrian

	07-12-2004 22:17									#11
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interesting OP

	07-12-2004 22:18									#12
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quote: Originally posted by chegitz guevara Those are the Congressional Budget Office's rosey figures. IIRC, before the Bush tax cuts, we weren't going to go negative until 2037.

There's no question that Bush's tax cuts for the rich and give pork to everyone policies has resulted in major damage to the nation's finances.

	07-12-2004 22:19									#13
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quote: Originally posted by Oerdin Really it's a joke to throw a bone to the far right.

No, it's a foot in the door to total privitisation. Once he can get us to accept a little bit, they can get us to accept some more, and then some more, and finally they can give the whole wad to the investment bankers who will then loot it ala the Savings and Loan, Insuance, and Mutual fund crises.

	07-12-2004 22:20									#14
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I posted a thread several days ago about a local texans municipal pension fund that is totally in the black because instead of putting its money in equities and paying large sums to manage that in the hope of profits, they simply figure out what their payouts need to be to meet the promised benefits in X amount of time and buy a bond, so that when they need the money, they have the money. They don;t try to "increase returns", they simply do with the money what they are there to do- provide the promised benefits.

	07-12-2004 22:25									#15
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I remember that thread, and I like the idea.

If you're going to have a government-run savings plan, it seems to me that a stable, conservative investment strategy (such as discussed in that article) is clearly the way to go.

-Arrian

	07-12-2004 22:40									#16
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privatize. or at least give me the oppertunity not to pay into SS and let me keep my money, and invest it myself.

	07-12-2004 22:42									#17
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Privitization.

	07-12-2004 22:57									#18
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quote: Originally posted by Lawrence of Arabia privatize. or at least give me the oppertunity not to pay into SS and let me keep my money, and invest it myself.

And then when you don;t have money when you are old, what should the state do with you? Leave you to die in the streets?

	07-12-2004 23:09									#19
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Just the libertarians, GePap.

	07-12-2004 23:11									#20
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quote: And then when you don;t have money when you are old, what should the state do with you? Leave you to die in the streets?

of course I'll have money. ill invest the money that goes to SS (10% a year) into the stock market on the lowest performing least risk stocks, and by the time I retire, I can retire an millionaire.

	07-12-2004 23:30									#21
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quote: Originally posted by Lawrence of Arabia of course I'll have money. ill invest the money that goes to SS (10% a year) into the stock market on the lowest performing least risk stocks, and by the time I retire, I can retire an millionaire.

You'll need to put away $10K a year at 6% interest for 30 years to retire a millionaire. And in thirty years, a million will be worth what? If inflation is the same as the last 30 years, then it will only be worth about a third to one half what it's worth today, so you'll need to sock away twice that amount. Do you make so much you can invest $20K a year?

	07-12-2004 23:33									#22
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whats so funny?

	07-12-2004 23:36									#23
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quote: Originally posted by Lawrence of Arabia of course I'll have money. ill invest the money that goes to SS (10% a year) into the stock market on the lowest performing least risk stocks, and by the time I retire, I can retire an millionaire.

You know, this is the fantasy people can't get away from.

Assuming of course you ever make enough money to invest and you have the discipline to put money away for investment as opposed to spending it all, and supposing you have no huge costs that come out of nowhere (victim of crime, act of God, medical tragedy), and supposing that there is no large market decline, then yes, maybe that will be true.

The odds are that this is just your fantasy. Public policy should be based on reality, not fantasy.

So again, when you are opld and struggling, should the state leave you to die?

	07-12-2004 23:37									#24
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Incidentally, Bill Frist's campaign just reported that they lost half a million dollars in the stock market since 2000.

	07-12-2004 23:41									#25
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quote: Originally posted by Lawrence of Arabia whats so funny?

That's 80% of the average wage. It also assumes the market doesn't tumble around the time you want to retire.

	07-12-2004 23:45									#26
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quote: You'll need to put away $10K a year at 6% interest for 30 years to retire a millionaire. And in thirty years, a million will be worth what? If inflation is the same as the last 30 years, then it will only be worth about a third to one half what it's worth today, so you'll need to sock away twice that amount. Do you make so much you can invest $20K a year?

no you dont, its compounded interest, not simple interest. each year the principal grows, and the interest from last year goes up, meaning an exponential growth rate.

quote: Assuming of course you ever make enough money to invest and you have the discipline to put money away for investment as opposed to spending it all, and supposing you have no huge costs that come out of nowhere (victim of crime, act of God, medical tragedy), and supposing that there is no large market decline, then yes, maybe that will be true.

of course ill have enough, ill have the money that the govt gives back to me that wont be put in SS. market decline? this is over a long time 40 years, any market decline will come and go, i wont cash out till the end.

	07-12-2004 23:46									#27
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quote: It also assumes the market doesn't tumble around the time you want to retire.

they'll be down for what? 2 or three years max? 4 at the outside? thats no problem

	07-12-2004 23:50									#28
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quote: Bush knows a total privitization won't fly so he's proposing that 3% of everyone's SSI taxes be put into a private account. The problem is if you make 50k per year that 3% will add up to less then $100. It's hard to see the big returns Republicans are promising when most of the people will get a total of $2000 in capital spread out over a twenty year period.

Your math is totally FUBAR, dude. Bush is taking 3 percentage points of everyone's SSI contribution (i.e., 3 percentage points of 12.75 percentage points) and putting it into private accounts. A 3% annual contribution on a $50k salary is $1,500 per annum.

	07-12-2004 23:51									#29
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"This report, by its very length, defends itself against the risk of being read." -- Winston Churchill

	07-12-2004 23:54									#30
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quote: Originally posted by Lawrence of Arabia of course ill have enough, ill have the money that the govt gives back to me that wont be put in SS. market decline? this is over a long time 40 years, any market decline will come and go, i wont cash out till the end.

On average if you put money into equities in 1929, your rate of returns would have been lower than those of bonds for the decades of the 30's, 40's and 50's. The notion that the market must be ever upwards is a new one, not a long time truth.

You also utterly ignore the issue of possible out of pocket costs you do not envision (like lets say you get divorced and your wife takes half and you have to pay child support).

There is a reason SS came into being-because people do NOT actually take all their money and squirrel it way in investments for their old age-most American stock ownership comes from people's IRA and other retirement plans not run individually, and our national savings rate is miserable.

Reality is clear- this dream that you might retire a millionaire is possible, but not probable. Public policy must be based on probability, not random possibilities.