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Dec 28, 2004 5:17 pm


I Must Be Dense



Michael Kinsley's article "If It's Right, It's Wrong" argues that the case for privatizing Social Security is logically absurd. I'm not getting it. Maybe someone can point out what he's saying. Here's the privotal point, I think:
Many people believe that stocks pay better than bonds in the risk-adjusted long run. If so, letting people buy stocks with part of their Social Security tax payments would improve the Social Security system's overall return. The cost would be borne by people who bought bonds instead of stocks.

Privatization, in other words, rests on persuading Americans to accept a theory that must be widely disbelieved in order to be true. It's like Tinker Bell in reverse: If too many people are convinced that the theory is right, it's wrong. And the White House is campaigning hard to convince everyone the theory is true. If the campaign succeeds, the theory fails.

Responses welcome.
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Jonathan Dresner - 12/31/2004

Yes, "fewer" should be "fewer as a proportion of the total population".


Mark Brady - 12/30/2004

I suggest that the prospective crisis arises from the fact that more retirees are expected to live longer and that this will place demands on the system that cannot be met even though the number of workers (don't forget net positive immigration) and their incomes may increase. It isn't a question of "fewer workers paying in."

The fall in the prices of internatinally tradeable goods and services ("globalization") is the result of increases in productivity that translate into lower prices. Competitive global markets prevent firms taking "most productivity increases" as profit. That said, I don't deny that foreign competition has prevented wages increasing (or even reduced them) in at least some of those sectors of the American economy where the balance of comparative advantage has shifted in favor of foreign suppliers.


Jonathan Dresner - 12/29/2004

The problem with social security is a demographic one: fewer workers paying in. But the economy hasn't shrunk because there are fewer workers; quite the contrary.

Here's a wildly impressionistic economic blanket statement: Most of the price decreases achieved in the last few decades have been the result of globalization rather than productivity increases. Most productivity increases are taken as profit.


Mark Brady - 12/29/2004

There is no necessary reason why we should expect productivity increases to translate into wage increases. However, ceteris paribus, in a competitive economy we should expect productivity increases to translate into lower prices of goods and services and thus raise the purchasing power of wages. Since "the employer portion of SS payments" is a fixed percentage of wages, there is thus no necessary reason why we should expect that portion "to keep track with worker productivity increases."


Jonathan Dresner - 12/29/2004

Insofar as there is a crisis in social security, it comes from the failure of the employer portion of SS payments to keep track with worker productivity increases. They keep telling us that US workers are the most productive in the world, and that productivity increases are a good thing that we should work towards, but the benefits rarely fall towards workers.


Mark Brady - 12/29/2004

I wish to suggest three qualifications to what Rob Smith has written. First, Social Security tax is "12.4% of all wage and salary earnings" if these are defined to include employer contributions to Social Security. Second, Social Security tax is levied on the first $87,900 of wages and salaries (defined to exclude employer contributions to Social Security). Income from work beyond that level is not subject to Social Security tax. Third, it's rather confusing to call the federal government's obligations to future retirees part of the National Debt since that expression (with a capitalized N and D) refers to the federal government's outstanding bonds and treasury bills. I think it's important that we explain exactly what is going on and how we are using words if we wish to make our arguments effectively.


Rob P. Smith - 12/28/2004

The "transition costs" is the latest buzz phrase bandied about by Democrats. Social Security was once referred to as 'the third rail' of politics. For non-New Yorkers this typical Eastcoast shorthand phrase needs explanation. New York Subways are electrically powered in three rails including a ground rail track. When an unfortunate victim, either accidently or deliberately, falls from a loading ramp and touches the third rail he is grounded and immediately fried. Such has happened to many reformers over the past half century. The opponents of change now have come to the hard reality that Americans want a discussion about a law passed before most of us were born.
Social Security withholding takes 12.4% of all wage & salary earnings. There is no personal exemption, standard or itemized deduction. It is withheld on the first dollar of income. Thus on $20,000 of income it is $2480 the worker never sees. Contrary to popular belief the money is not held in a 'Trust Account', as the myth the New Deal lawmakers have perpetrated since 1936, the money is paid out instantaneously to others. But what does this transaction between the worker and the government do to government? It leaves the government with an unpaid debt.
Herein is the structural flaw. Each $1 of Social Security Tax withheld from a workers paycheck is $1 added to the National Debt. In fact, it can be argued Social Security is the single largest component of the National Debt. Most people think of the National Debt like home mortgage, you work hard, save money and eventually reduce the amount of money you owe. The problem is the debt grows 12.4% for each 1 minute of labor performed, multiplied by 130 million workers. In other words, the more we work, the harder we work, the more people employed, the greater the National Debt becomes. Here's the hard truth in a conclusion: we cannot 'payoff' the National Debt by labor, i.e. working. The growth of debt is tied to labor by the withholding tax.
Milton Friedman in his 1980 treaties 'Free to Choose' gave us the simple solution to 'transition costs' in privitizing Social Security, and reducing the astronomical growth of government debt. Repeal the withholding tax (or at least allow workers to redirect a portion of their withholding into private managed accounts) and secondly float a bond issue to payoff existing beneficiaries. Repealing the withholding tax would have the immediate affect of 'capping' the existing debt, rather than its untrammelled growth tied to how productive we are. The existing debt, or "transition costs" would immediately become finite, and then could be paid off as government has always financed its debts. Herein is the rub, the proponents of the status quo are for expanding debt, as more & more workers join the work force each year, and as all workers work harder. Their view is one of infinite exploding debt. By 'capping' the debt, to use more Washington & Eastcoast shorthand, the largest cause of out of control debt suddenly becomes a fixed number. The differance is between fixed transition costs and limitless debt than can never be paid off by working.

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