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January 14, 2005

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Jim Thomason

From a report quoted approvingly by Krugman :

"a recent report by Britain's Pensions Commission, which warns that at least 75 percent of those with private investment accounts will not have enough savings to provide "adequate pensions."

Well, considering that right now - before any potential benefit cuts - 100% of those on SS are not receiving an "adequate pension", that sounds like quite an improvement. So what's the problem?

Paul Zrimsek

Since I don't seem to have found any takers for my first reform plan (the one to take that no-big-deal 27% benefit cut now instead of in 2042, and use the money to save Medicare), it's time to float my Krugman-inspired Reform Plan #2: Abolish the private capital markets and make SS the sole vehicle for retirement savings. Why should we leave ANY money trapped in the living hell of capital risk and unregulated money managers?

If we get too much pushback from those old fogeys who still think the national savings rate matters, we could compromise: instead of forcing everyone's savings into SS, we could allow voluntary additional contributions above and beyond payroll taxes. At least that would give people the option to take advantage of Social Security's quasi-guaranteed returns, while hacks like Don Luskin will no doubt be able to dupe enough red-staters into rolling the dice in the Enron casino to keep the smirking chimp's Wall Street cronies from being thrown out of work.

Eric Lindholm

Rhetorical question: doesn't Krugman even *suspect* that just maybe the U.S. economy is exceptional and not open to facile comparison to other countries such as Argentina.

I'm waiting for a future column starting: "The Republicans want a currency stabilization plan that was attempted in Togo..."

Mantic

The issue, in my mind is the first consideration in the British Pension Commission Exec Summary: "(i) pensioners will become poorer relative to the rest of society."

The issue is one of managing expectations. Social Security is not designed to provide salary continuation as described in my posted response on this subject. (see my URL)

tautala

I think we should begin reducing benefits as soon as the receipts don't support the benefits. Forget the trust fund. Remember that the trust fund that was built up by the current generation was spent by the current generation. If they (we) didn't have the guts to manage our money right, then why should the future pay us back. If we don't have the balls to fix SS now, why shouldn't we start feeling the pain right away. "We" can live with the results or fix it. Not passing it off to the next generation.

Creech

My gosh, why are we ignoring the real crisis: the
inability of Americans to make proper choices about
their living quarters! Some 65% of dwellings are owned
not leased. Huge numbers are foreclosed every year - Americans in the millions have lost their homes because
they made bad investment decisions. Tens of thousands
are homeless! Sure, some do fine, build up equity, etc.
But because some Americans can make good housing decisions, we cannot abandon those who don't. People pick bad or declining neighborhoods; some buy on or near flood plains and quake faults; others don't have the skill to keep their homes in repair; some lose the ability to pay mortgages for "too much" home; some shortchange their kids by picking the wrong school district to live in. Therefore, I suggest the government set up a SHELTER SECURITY ADMINISTRATION. (Understand, it is "for the children.") No one would be allowed to own their homes privately. Everyone would pay 25% of their gross into a fund and the SSA would determine the kind of house (and where) you would get.
When will we finally get the nerve to abandon the foolish notion that government should not use its coercive power to flatten everyone to the lowest common denominator?

LYNN

I am 58,"retired" as is my wife. My wife has a public employee retirement so is not eligble for SS, even if she paid into it nor is she eligble to receive a spouse or widow benifit - it is all offset. We just canceled our membership in AARP over its head in the sand approach.

Robert Bell

There is a very upbeat article about Chile's privatization scheme in the New York Times archives, though it costs $$$ to get.

http://query.nytimes.com/gst/abstract.html?res=F30A17F63A5A0C728CDDAB0994DC404482&incamp=archive:search

While Chile is unlike the U.S. in many ways, but I believe they consulted with the best and brightest here to design their plan.

I think the distinction between an insurance scheme and a retirement scheme is the most important aspect of a solution. The problems of designing a good insurance scheme (e.g. moral hazard, actuarial assumptions, etc) are at least well understood, if sometimes very difficult.

Another aspect which doesn't seem to get much play is the distinction between the liabilities a retirement plan has to fund versus the investment scheme used to fund it. The individualization of the investment side of the equation is certainly tenable (i.e. one can cheaply build a portfolio of stocks, bonds, etc although individuals generally cannot invest in hedge funds, private equity, collectibles, and many types of real estate). However, having an individual as the basic unit of the liability stream seems idiotic. It makes sense to pool groups of people so that one can bring diversification into the payout stream. That way, if I unexpectedly live longer but my neighbor unexpectedly dies sooner, we cancel out.

Seems like a good time to buy financial service companies with brokerage and trust operations.

Scott

Here is a free article about how well Chile's 24-year privatization of social security has worked. If Krugman was honest, he would cite this as an example of how to do it correctly instead of just try to scare us with another failure. http://www.cato.org/pubs/journal/cj15n2-3-1.html

stan

If 401(k)s and IRAs can somehow be managed with administrative nightmares, why not private SS accounts? In fact, how hard would it be to add the social security contribution to a separate account within a 401(k)? If a company offers 10 mutual fund options for the qualified plan, offer the same options for the SS account.

Neil'

I think the big point most are missing is: SS is designed specifically to be a pooled (mutualized), annuity-payment system offering backup ("insurance")versus everything else. That "else" of the private investment world is something you always had a right and access to pay into with whatever you have in your net income. Why take it *from* the social security system? Even if the SS system could make more money through investing money instead of just moving it, it should stay mutualized to make the coverage averaged out. (Reminder: any annuity *must* have a pooled source, since regardless of who administers it, "your account" can't really shrink or expand according to how long you live!)

BTW, it is oft forgotten that we already have a "privatized government-sponsored SS system" in the form of the IRA process, which is tax-subsidized.

deona

There is an outstandingly good dialog going on on Media Matters for America this weekend. Liberals that have been sticking to the party line on Social Security are actually reading arguments against them, and actually starting to take them seriously.

Take a minute:

http://mediamatters.org/comments/latest/200501140003

(latest ones come up first)

jag

Creech is right, how can we possibly let people (virtually totally ignorant of the financial and economic risks of buying property leveraged 80%) take on such risks?

I say we also take out another 10% in taxes and force everyone to have "proper" life insurance. Talk to any financial planner and they'll tell you that's the place to start a "prudent" plan for security. They'll also tell you most people are underinsured. How can we possibly let people continue to make this ENORMOUS mistake?

Next, too many people don't sand their icy sidewalks enough. Lets make them.............

Aaron

Neil,

As long as it was planned correctly,AND ADVERTSISED AS SUCH, that would be fine.

SS has a big problem in that it's not clear what exactly it is.

Rob Read

Cough,
I work in the UK pensions industry. Krugmans talking complete crap. Private pension holders are much better off than relying on the state, and the retired demographic have the most disposable income.

Problems with the UK Pensions system are:
a) The UK chancellor has raided pension funds for tax i.e. double taxation.
b) Pension returns are currently quite low, because gilts have a low return, because of low interest rates.
c) You are forced to convert 75% of your pension fund on retirement into purchasing an annuity. If you die the next day all that money goes to the assurance company.
d) High fund costs as the state keeps changing the rules.
e) The state suddenly made companies with final salary schemes declare them as accounting liabilites which made them all get closed down in a hurry. The state forgot to include a rule involving equivalent compensation, so the final salary schemes get contributions @ 20% of salary, and money purchase get around contributions @ 5%.
f) Opting out of S2P the second state (earnings related) pension only gets a very very low National Insurance rebate.
g) Money Purchase annuity rates are low (~5%)because people are living much longer, and have a much greater %age of their lives spent retired. The retirement age is currently fixed at 65.

It's not privatisation that is the problem, it's the state!

P.S. Low cost completion only SIPPs (Self Invested Personal Pensions) which allow you to play the UK stock market or just buy tracker funds inside a pension vehicle are the future for the UK. No-one under 40 in the UK expects their to be a pension when it's time for them to retire.

Ramrod

I hardly think I would be likely to go to Mr. Krugman for advice on how to invest money for my retirement. Likewise the results of an increasingly socialistic Brit government.

Before we get anywhere at all, the Liberal side has to get to the point of admitting that there is a problem. At this point they have vehemently denied that any problem exists, although both sides have been gleefully spending the excess of revenues over pension payments for decades. They have had no problem screaming over unfunded pension liabilities in the private sector for years. That, of course, they can blame on unfettered evil business management screwing the worker.

If the liberal establishment ever gets to accepting the reality of the demographics of the work force going against us after the WWII baby boom they will then have to consider the best way to face up to the problem. The Republican side has likewise got a credibility problem since we keep hearing them say that the Social Security Fund will go bankrupt at, say, 3:00pm on July 27, 2042 or some such day. The actual arrival of the bad day depends on all the items that actuarial tables and calculations take into account, but it will arrive sure as houses.

Only four possibilities exist, that I am aware of, to fix the problem: [1] Stop or reduce paying benefits, [2] Increase the payroll taxes to cover the shortfall, [3] Increase the individual earnings on the individual or total accounts over the working lifetime of the participants. [This is where the sekf administered account comes in, since as long as the pensions are paid directly out of the General Funds of the United States this is not possible] or [4] pay the shortfall out of the general tax revenues. A fifth possibility also exists, that is a combination of the others. It seems obvious, however, that the sooner the fix is begun the less the annual impact on each working individual or US Government.

I know that this seems like Economics 101 but the basic problem never seems to be part of the newspaper articles just the horror of individual accounts.

If we can agree on the problem perhaps we can agree on an approach to solving it. If the investments were limited, as proposed, to some very safe Governments or bonds and their return shielded fom taxation, the individual would virtually be guaranteed of better return than his current expectations in Social Security.

exguru

Most of the individual account money in the US will go into government bonds or other fixed income investments, partly because the supply of big cap stock will not be great enough for the Niagara of money, but mostly because the average mutt will opt for "safety" as he perceives it, which means Treasury paper. Still, he will do three times as well as under the status quo.

The biggest failing of the British system, as I understand it, was the handling costs were too high on individual accounts, party because institutions handling them were greedy, but also because automation had not reached today's excellence in 1983 when Thatcher started the ball rolling. There is no doubt in my mind the handling costs in America today will be so low they are astonishing, given the state of our technology.

So, all aboard! Yes, even the 'crats know individual accounts are an idea whose time has come. There is very small outcry from the Left, and I think Bush will get his ss reform with surprising ease.

Rob Read

exguru,
handling charges are high becuase pensions are unnescessarily complicated.

Execution only SIPPS offer the lowest charges, and are THE most personal personal pension.

penis enlargement pills

I agree with you the way you view the issue. I remember Jack London once said everything positive has a negative side; everything negative has positive side. It is also interesting to see different viewpoints & learn useful things in the discussion.

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