Burnt Orange Report

I respect what you're saying here, Andrew, but on this issue I agree with Big Media Matt.

We know that Social Security is a train wreck waiting to happen just 2030 years down the line.

The rule of 72, if used here, says that our SS money will only double for dollars paid into the program before age 27. How do you expect to grow anything if you cannot get a better return than 2%? We need another direction. Securing a higher return is required to make any retirement account work. Spend what 8 to 10 Trillion now or 40 some Trillion later to fix this.

Its like that 1986 Ford driving down the street, smoke coming out of the exaust. You think to yourself that shouldn't be on the road, but its still driving down the street. Do you want to fix the car or replace it? Fix it and you're still stuck with the 86 Ford. Replace it and now we're more fuel efficient and environmentally friendly, and you're proud to see the car on the street.

Lets do something to get a higher return, maybe leave some of it to our offspring.

You keep wishing, I'll keep counting.

Thanks Fight the Power, I agree that the exact time frame is shaky. But the demographics are very clear- there will be more old people taking social security and fewer young people paying SS taxes and that adds up to a drain on the system. At the current rate of taxes and benefits, the system will eventually consume itself, leading to a massive crisis the likes of which we've never seen. Something has to be done to fix the system. Doing what we are doing now simply won't work.

So things have to change. Why not create a system that gives people more money, more control of their tax dollars and lets them give some of it to their kids? The average American worker will have a more secure retirement and their kids will end up wealthier in the end also.

My biggest fear, and I should have put this in the post but it was getting kind of long, is that with so many people with so much investment return we'll have a big inflation problem down the line. As an economist, what's your take?

Andrew,

I'd encourage you to check out the following as you think more about this:

December 7, 2004,"Inventing A Crisis" By PAUL KRUGMAN (NYT) Op-Ed 820 words. Late Edition - Final , Section A , Page 27 , Column 6.

"Borrow, Speculate and Hope" By PAUL KRUGMAN. Published: December 10, 2004.
http://www.nytimes.com/2004/12/10/opinion/10krugman.html?oref=login&n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists%2fPaul%20Krugman

(You can access both of these through the UT Library online once they migrate off the NY Times' free service)

"It's not broken, so don't fix it" Mark Weisbrot, Center for Economic and Policy Research.
http://www.cepr.net/columns/weisbrot/mark_column_10_18_04.htm

Keep in mind that SS is not and never was meant to be a retirement fund.

Also, there are serious questions (a la the great collapse of the dot.com boom in the late 1990s) about the wisdom of encouraging the untrained masses to fool around in the stock market, especially when there are no short-term consequences. My personal experience concurs. Back in the day when everyone and their mother got employee purchase plans and stock options, working in a high-tech company in Austin was like living on the trading floor. Every little rumor about something bad happening sent everone clamoring to log onto their e-trade accounts and sell off their stock. Before the privatization argument goes any further, there needs to be some serious discussion of 1) how the government plans to educate Americans about managing investments (and the scientific rigor of said strategies) and 2) the potentially devastating instabilities a huge influx of inexperienced investors could have on the U.S. economy.

Actually, to put this issue into even better perspective, consider that Bush's 2004 campaign was the 3rd consecutive winning campaign to openly discuss partial privatization of Social Security. Of course, this means little to those who are already dismissive of the winning track record the first guy had in electoral politics. So be it.

Guys:

I would remind everyone who is saying "there is no crisis so we can do nothing" that the government would and should prefer to avoid a train wreck that has a 30 or 40 or 50 percent chance of occurring, if at all possible.

The problem is that we also would hope the government would not engineer a guaranteed train wreck.

That is why I hope that the Democratic leadership puts together an alternative plan.

I agree with Matt Yglesias about the "progress paradox" thing. And I think the Republicans are promising everything but the kitchen sink, and if they do that it becomes inevitable that the social security degenerates into a slush fund for middle-class, middle-aged hedonists. Do the Republicans have the balls to tell people no when they want to raid their accounts early to pay off their credit card? Probably not. After all, the GOP doesn't really want to save social security.

But we do, and I think we have a responsibility for devising workable reforms and selling it to the American people as a responsible new covenant with the American people.

Anyways, another thought:

Because benefits are wage-indexed, saying that a problem does not exists because SSA's projections for GDP growth are "too pessimistic" doesn't get you very far.

If GDP growth is higher than 1.6 percent -- and given the demographics, I think that's pessimistic but not excessively pessimistic, I think it's a responsibile estimate -- anyways, if GDP growth is higher, we will have a few more years, but eventually the growth in benefits (which are wage-indexed) will catch up with the higher revenues, and we'll be in the same boat.

My guess is that long-run GDP growth will be about 2 percent, and the trust fund will run out of money in or around 2055. Just my gut feeling. I think there's a 30 percent chance it'll be worse and a 30 percent chance it'll be better.

I have an idea about how privatization of Social Security might work:

A worker could have an account ("ISSA") like an IRA-- choose his own brokerage (or other financial institution(s)) at which to hold it, choose whichever investment vehicle(s) (except certain high-risk ones) he wanted, and pay the brokerage fees for making the investment transactions in the account. However, the brokerage would merely be holding the funds for the Social Security Administration of the government. The worker would retire and start collecting Social Security, and take distributions, just like from his IRA. The government would still continue to calculate the amount to which the worker would be entitled every month, and the SSA (through the brokerage) would pay it out. There could be special rules for a worker who bankrupted his ISSA, like by buying all stocks that went bankrupt-- there would be some formula whereby his Social Security check would be reduced propotionate to his losses.