Always The Red, Never The Black

I infer from his column lead that Paul Krugman has never played, or watched, a three card monte game in the Greatest City in the World.  Too bad - even a college prof could learn something standing on the street corner.  His lead:

Hell hath no fury like a scammer foiled. The card shark caught marking the deck, the auto dealer caught resetting a used car's odometer, is rarely contrite. On the contrary, they're usually angry, and they lash out at their intended marks, crying hypocrisy.

Not so, at least in my experience.  Back when I was young and bold, circumstances would sometimes place me in the vicinity of Times Square on a Saturday night, taking the long and adventurous walk to the (relative) calm of the Upper West Side.  One of my diversions was to watch the three-card monte games, in which a card sharp, generally working with a shill, tries to entice passersby into pointing out the red card as he mixes it amongst two black cards, all of which are face down.

It's fun to watch, and you really only need to play once to experience the cross-currents of greed and fear - can it it be that easy, c'mon, I can guess that, the red card is on the left, will I really get paid my twenty bucks, gee, is that guy who just won three times in a row legit, or a shill...  well, it did pass the time.  And no, you won't win.

On one occasion (as I build towards something resembling a point), several spectators watched as the card sharp and a shill matched wits with a just-off-the-boat, just-off-the-farm sailor who was spending his evening in Times Square a bit less prudently than I.

"Go ahead", the shill says to the sailor, "the red card is on the left".  Oh, but it's not!  Down $20.

"Yeah, you've got it, it's on the right" says the shill.  Ooops, wrong again!

"C'mon, you can't miss, I bent the card while he wasn't looking", was the third enticement.  Yet even with the "marked" card, the sailor loses yet again.

And now, a moment of drama - the sailor turns, stares in puzzlement at the shill, and the dawn comes up like thunder - "Wait a second, you're working with him!  Hey, you're cheating me!"

Do tell.  And what would follow this bulletin?  Would there be a brawl?  Would the sailor be dragged into an alley and silenced?  Not at all.  Without saying a word the dealer pockets the cards and heads south, the shill heads north, and the sailor is left to commiserate with three essentially useless spectators, none of who were inclined to expound upon life's lessons.

Well.  Paul Krugman vigorously debunks his latest strawman, and we will not interrupt.  However, we enjoy this puzzle he poses:

If the economy grows as fast over the next 50 years as it did over the past half-century, Social Security will do just fine.

Good news!  But when he gets around to reading the work of, say, Paul Krugman, what will his position be?  It was only last Feb 1 that Krugman explained that privatization advocates were evil schemers  who were maliciously failing to incorporate the low growth forecasts for the US economy into their stock forecasts.  Back then, anyway, the Earnest Prof understood that GDP growth came from both increases in productivity, and increases in the size of the work force.  Since the work force is expected to grow more slowly over the next fifty years than formerly, GDP growth will also be reduced.  His point then (later modified substantially) was that if the economy grows more slowly, the realized return on capital must be less. 

In fact, in February Krugman said that "a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting."

Is he still "anyone", or is he now expecting a higher growth rate for the economy?

UPDATE:  Tim Worstall notes a "time value of money" issue.  Let's excerpt Krugman:

Suppose you're earning $60,000 a year. On average, Mr. Bush cut taxes for workers like you by about $1,000 per year. But by 2045 the Bush Social Security plan would cut benefits for workers like you by about $6,500 per year. Not a very good deal.

Hmm, if I can save $1,000 per year until 1945, and then give up $6,500 per year, is that a good deal? 

Well, how long will I live after age 65?  And what is the interest rate?  And are these real or nominal dollars?  Who knows (or cares?)

Regardless, by my quick calculation, if I can save $1,000 per year for thirty years at 5%, and then lose $6,5000 per year for fifteen years, I roughly break even.  Now, breaking even is not "a very good deal", just as Krugman told us.  But breaking even is not so bad, either.

And let's note that Krugman picked 2045, which is forty years away, whereas I used thirty years in my calculation.

STILL MORE:  My apologies to Professor Krugman - Jim Glass has reminded me that some scammers, once caught, can indeed be angry and lash out at their critics.

As an example, Mr. Glass offers P Krugman himself.  This column (which opened with an Eerily Self-Aware reference to "The Onion") made a ghastly mistake, confusing the (relatively small) future liabilities of Medicare Part A with the ginormous liabilities of the full Medicare program.  In his response to his critics, the Offended Prof demanded an apology for being unfairly maligned.

His defense was that "When people talk about the financial crisis facing "Medicare", they are talking about the trust fund, i.e., Medicare part A.".  That must have been a "True For One Special Day" defense, since that subtle distinction eluded the Prof both before and after.

Comments

[Tim Worstall]

Tom,
Quite the most fun thing about the Krugman column is that he gets his math wrong. The middle class guy on $60k a year makes out like a bandit under the proposals.
http://timworstall.typepad.com/timworstall/2005/05/krugmans_number.html

[Tom_with_a_Dream]

Thanks for the vocabulary lesson. (I skipped the meat of Krugman and the SS/Economy, too drained to dig today.)

Card Shark = Card Sharp

[Jim Glass]

As to future growth, Krugman's argument actually works the other way around from what he wants:

If future economic growth will be strong then it will be easy to afford private accounts that provide workers with much more than the current SS's negative returns.

But if future economic growth will be weaker than the the SS acturaries project, then SS has a much bigger shortfall than projected -- and even bigger benefit cuts and tax hikes will be necessary to keep it paygo.

Perhaps Prof K should take the lead in insisting that Democratic politicians explain this, and state whose benefits they are going to cut and whose taxes they are going to hike to cover the extra large shortfall.

Now, as to who gets angry more when a con is exposed, the mob that was conned or the cons who conned them, we'll see around the year 2030.

That's when the actuaries say income taxes will have to go up 35% from today's levels just to cover the operation of the trust funds.

Now, imagine you are around 30 years old today and are hearing the Dems say over and over :"SS is just fine as it is even if we do nothing at all for 40 years -- we have a trust fund covering it!", and you believe them, and vote to do nothing.

Then when you are about 50 years old you hear the Democrats say: "OK, now you have to start paying an additional 35% income tax hike on top of your payroll taxes. That's to reimburse the trust fund for the payroll taxes you paid for the last 30 years that aren't there, in order to be able to collect your SS benefits, which will still be 25% underfunded.

"Of course, you'll have to keep paying this income tax on your benefits even after you retire, in order to enable the trust fund to pay them to you."

Maybe you then think: Hmmm ... I'm paying for the same benefits twice, for the rest of my life, and even so they are still 25% underfunded ... which it seems was the Democrats' definition in the 2006 election of 'doing nothing for 40 years.'

Who is going to be more angry then: You or Nancy Pelosi and Harry Reid?

(Then maybe multiply that by millions).

[The Indigent Blogger]

Since there is not a history of long life amongst males in my family, I'll take the $1,000 per year tax savings and forego the $6,500 per year cut of my SS benefits in the future.

Also, I agree with Tom. When I was hustling on the streets of Santa Ana and Huntington Beach, people who got caught in a scam just split because a fight meant cops, and cops were bad news for everyone involved.

[Harry Arthur]

Jim, unfortunately Nancy Pelosi and Harry Reid will probably be dead. Deep in their hearts they know what they're doing but as long as it's in opposition to Bush it's fine - maybe, just maybe, they can win the next election.

The people in Galveston, however, will truly be fine because they already have a private system. The people in Chile will also be wondering about the stupid gringos up north who had a chance to fix our retirement program and didn't take it - all for political points.

I just hope I live long enough to see the current 20 to 30 YOs who are arguing, some on this site, for the do-nothing option, so I can say "told you so."

As usual your analysis is "spot on" IMHO.

[Larry Jones]

This characterization by Paul Krugman of a $60,000/year worker as "middle class" is completely bogus. That $60,000 refers to a worker's average annual earnings over an entire lifetime (you would need to earn $60,000 a year for 35 years in order to have that average). Somebody with that work history would actually end up in the richest 15 percent of workers upon retirement.

Nancy Pelosi characterized a worker with average annual earnings of $90,000 as "solidly middle class." However, that worker has lifetime earnings greater than 99 percent of the population. Harry Reid characterized a worker with average annual earnings of $60,000 as an "average earner," even though that worker would have lifetime earnings greater than 85 percent of the population. Reid's web site also characterizers a worker with average annual earnings of $36,000 as a "lower waged earner," even though that worker would end up with lifetime earnings greater than 57 percent of the population.

In short, the dollar figures thrown out by opponents of reform are intentionally deceptive. Every time they throw out a dollar figure, we need to respond by noting where that worker actually is in the income distribution. If Democrats can play the "richest 1 percent" game on tax relief, then we need to do the same when it comes to Social Security reform.

[TexasToast]

"Well. Paul Krugman vigorously debunks his latest strawman, and we will not interrupt."

You guys need to enlighten me - because I don't see any "strawman" in Krugman's column. I always thought that a strawman was the refutation of a substituted argument (via distortion, exaggeration or misrepresentation) vs the refutation of the argument actually presented. Krugman argues in his column that Mr. Bush’s most recent social security proposal’s “tilt” in favor of the lower income taxpayer is more than offset by the “tilt” in favor of the upper income taxpayer by the tax cuts already enacted in Mr. Bush’s first term. This is not a “strawman” as it does not misrepresent, exaggerate or distort the “tilt” in the social security proposal. It only points out the context by presenting more facts.

[Patrick R. Sullivan]

Strawman:

"Suppose, finally, that you're making $1 million a year. You received a tax cut worth about $50,000 per year. By 2045 the Bush plan would reduce benefits for people like you by about $9,400 per year. We have a winner!"

Almost no one earns that kind of money year in and year out. We're talking about pro athletes and movie stars. And anything above $90,000 isn't subject to SS taxes, so this is irrelevant. (Btw, what kind of retirement income does Krugman think, say, Mike Tyson--who earned his millions before the Bush tax cuts--will have?)

But, this is piquant, coming from a guy who who accuses others of being scam artists:

"I'm not being unfair. In fact, I've weighted the scales heavily in Mr. Bush's favor, because the tax cuts will cost much more than the benefit cuts would save. Repealing Mr. Bush's tax cuts would yield enough revenue to call off his proposed benefit cuts, and still leave $8 trillion in change."

Absolute baloney. There will never be the kind of tax revenue, no matter what rates are, to generate that kind of revenue. It's never happened before, and it never will. Any attempt to get 30% of GDP in taxes will just make everyone poorer.

[Crank]

they're usually angry, and they lash out at their intended marks, crying hypocrisy.

Lots of anger: check.
Frequent charges of hypocrisy: check.

A little projection by The Krug?

[TM]

LOL, Crank.

As to strawmen, I tuned out in the second paragraph with this:

Now [privatization supporters] are accusing their opponents of coddling the rich and not caring about the poor.

Huh? Maybe Tex can provide something to verify that.

[Jim Glass]

"Jim, unfortunately Nancy Pelosi and Harry Reid will probably be dead. Deep in their hearts they know what they're doing but as long as it's in opposition to Bush it's fine - maybe, just maybe, they can win the next election..."

Harry, if you read a good history of SS (like this)you'll find the "we'll win this election now and be dead when the bill comes due for somebody else to pay" politcal strategy operating throughout.

Starting in 1939, when Arthur Altmeyer, the first head of the SSA, met with Congressional leaders to complain about how they were converting FDR's actuarially sound SS into an unsound paygo system that would inevitably collapse by the time the young of 1940 reached retirement age.

He said the Congressional leaders responded, "We'll all be dead". And in 1980 Social Security went bankrupt for the first time -- just as the 20-year-olds of 1940 were about to retire.

Then to save the benefits of those retirees, Congress upped payroll taxes and slashed the benefits of the young in a temporary fix that many noted even then would create an even bigger crisis when the 20-year-olds of 1980 approached retirement age. About which the Congressional leaders said...

[Patrick R. Sullivan]

As an alternative way of judging, a back of the envelope calculation tells me someone who averages $90,000 for 35 years would pay about $390,000 in SS taxes. Under the Bush plan those people would only get 12% of that replaced each year. Meaning said individuals would have to live to over 100 to recover just what they paid in.

For those averaging $60,000 for the same 35 years, their $260,000 in SS taxes would be back in their pockets at age 84.

The $20,000 paupers would have paid in $87,000, and at a 49% replacement, be even by age 76.

No one gets any compensation for their lost opportunity costs. It's obvious that the high earners are getting the rawest deal, though.

[Jim Glass]

Krugman:

"Repealing Mr. Bush's tax cuts would yield enough revenue to call off his proposed benefit cuts, and still leave $8 trillion in change."

Which brings to mind his biggest howler ever ever -- to the tune 14 digits $$ current value in proclaiming ...

"the revenue that will be lost because of the Bush tax cuts ... would have been more than enough to 'top up' Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years." ;-)

An error too small to ever be corrected in the Times, of course. And which when pointed out in the comments sections of certain blogs drew the entirely Krugman-like response: 'It's not a mistake ... It's supposed to be a mistake that I ignored the largest part of Medicare? .... Bill Gale made the mistake and I relied on him ... I'm being slandered and am owed an apology! An abject apology!!

"Lots of anger: check. Frequent charges of hypocrisy: check. A little projection by The Krug?"

The guy's become more interesting as a psychological study than any kind of analyst, IMHO. Such as how to him there are no errors, only malevolence on the part of anybody who is wrong -- including himself!

Look at the little example cited above. He makes a 14-digit $$$ error in his Times column. Others point it out. Thus others are accusing him of intentionally lying. But he is honest!

Therefore, as the result of his making a 14-digit $$ error, "they owe me an abject apology".

Interesting, eh?

[Jim Glass]

PK's psychological quirks aside, his substantive big assumption that general income tax revenue should be poured into Social Security to preserve full transfers to the well off produces a fundamental change in SS that was explicitly rejected by FDR from the start, and has been by all the guardians of SS since.

Yet PK never says "I'm redesigning Social Security after that FDR, and all those SSA Trustees since, who all knew so much less about the politics of government programs than I do, so screwed it up". It's just that of course, obviously, we should pour general revenue into SS.

The joke is this makes sense only if Krugman really believes that the day is going to come when liberals will say, "Cut education, cut welfare for the truly poor, and cut Medicare, because we need these general revenue dollars to pay SS transfers to Bill Gates and all the other old millionaires in America first, to keep them supporting the program!"

Of course this day is going to come by 2030 when income taxes will have to be hiked 35% -- or equivalent amounts will have to be cut from other programs -- just to cover the trust funds. And I want to live to see that day.

Yes, my kids often make me want to kill myself. But I want to live to 2030 to see the day when Paul Krugman himself argues that income taxes should be raised a full 67% now, with more coming, to pay SS and Medicare benefits to Bill Gates, the Walton family, & all the other senior millionaires of America, as liberal, progressive policy.

Because otherwise, without tax hikes that big, these programs will become politically unsustainable.

I want to live to see that day.

[Jor]

lol, amusing story, but its almost a schzoid-like tangent. Anyway, I think this basically sums up the whole post
"But breaking even is not so bad, either.".

I know, we need Bush appologists to keep us honest, but sometimes I feel for them, I really do.

[Harry Arthur]

Jor, it doesn't bother you that the government forces you to "contribute" SSI throughout your lifetime, some portion of which may or may not be there for your retirement, and the best you can say about this wonderful program to sustain you in old age is that "breaking even is not so bad, either"????

I hope you're young enough to reap the fruits of your argument.

Don't feel bad for us. Feel bad for the young people in their 20s and 30s, my kids, that will bear the inevitable tax burdens should we fail to at least start taking action to fix this funding problem now.

[dsquared]

[Of course this day is going to come by 2030 when income taxes will have to be hiked 35%]

Jim, do you mean 35 percentage points, or is this a "percentage of a percentage" again? I can't stress enough that this way of talking about tax increases is more or less bound to lead to confusion.

Also, why is the assumption here that all of the burden has to be met from the income tax? Or is this just the income tax component of some more sensible allocation of the tax cost?

[Harry Arthur]

dsquared, you asked "why is the assumption here that all of the burden has to be met from the income tax?" Is there another tax that will do the job? Another source of revenue? I could be missing your point but as you may recall in 2017 SS revenue is no longer in surplus and can no longer be used to mask the true size of the general fund deficit as it has been since the 1960s. Therefore, starting in 2017 or thereabouts general fund taxes will have to be raised to make up the shortfall both in the general fund and to pay a portion of the SS benefits since the trustees will have to begin cashing the bonds held by the trust fund.

Jim said "Then when you are about 50 years old you hear the Democrats say: 'OK, now you have to start paying an additional 35% income tax hike on top of your payroll taxes. That's to reimburse the trust fund for the payroll taxes you paid for the last 30 years that aren't there, in order to be able to collect your SS benefits, which will still be 25% underfunded." I agree completely with his assertion and his analysis and quite frankly have yet to see it successfully factually disputed.

This is an actual percentage rate increase, not a percentage applied to a percentage, at least as I understand the explanation. My common sense tells me that whether the number is 35% or some other number doesn't really matter, the important point is that this will be a very real and very large increase in the tax burden for those who are now in their 20s and 30s. And I'm honestly not sure they have an appreciation for the implications to their lives and their finances.

If and when they ever come to this realization, they will likely dress up as indians and dump the tea in the harbor - and they should.

[Patrick R. Sullivan]

'Jim, do you mean 35 percentage points, or is this a "percentage of a percentage" again? I can't stress enough that this way of talking about tax increases is more or less bound to lead to confusion.'

From the non-confused: he's talking about increases in revenues from where they are today. Here's the math: To go from 3 workers being taxed to support 1 retiree benefit of $1,000 per month, to 2 workers (where the demographics are headed) for each retiree, is a 50% increase in the taxpayers' burden:

$12,000/3= $4,000 per year. $12,000/2=$6,000 per year.

It's actually worse, since the true ratio is now about 3.4:1. Or, as Max recently opined, we need to get to the Federal govt taking 30% of GDP to finance SS, Medicare, and Medicaid. Which is 12 points above the average take of the last SIXTY years. I make that a 67% increase. How about you?

[dsquared]

[Is there another tax that will do the job? Another source of revenue?]

Well, not so long ago we used to tax dividends, for one thing. The last time Jim went through this calculation, it looked to me as if he was using a base year in which the corporation tax base had been artificially reduced by the 2001 accelerated depreciation allowances, which (IIRC) have now expired. It's just that the figure of "35%" looks like a claim that an *additional* more than one-third of incomes will be needed to make Social Security payments, and this number is just way too big. The last time I discussed this one with Jim, he was definitely using percentages of percentages; I'm just trying to find out whether this is a new calculation.

[dsquared]

Oh, and going back to that old debate reminds me that Jim (less so Patrick) is often quite careless about when he's using numbers which refer to Social Security, and when he's using numbers which refer to Social Security plus Medicaid, so I'd appreciate some clarity on that one.

"Which is 12 points above the average take of the last SIXTY years. I make that a 67% increase. How about you?"

I make it a twelve percentage point increase. Calculating percentages of percentages will often give you numbers greater than 100% or less than zero, and is always a bad way to present this kind of figure.

btw, Patrick, you appear to be explicitly making the assumption that the entire burden of the tax increase will fall on workers; I'd appreciate if Jim could confirm whether or not he is making this assumption too.

[Patrick R. Sullivan]

"If and when they ever come to this realization, they will likely dress up as indians and dump the tea in the harbor - and they should."

The Washington state legislature just increased the tax on gasoline by $ .09/gallon, and now talk radio shows are promoting an initiative to repeal it. Which should be a clue about people's tolerance for increased taxes.

[Patrick R. Sullivan]

"Calculating percentages of percentages will often give you numbers greater than 100% or less than zero, and is always a bad way to present this kind of figure."

Ahem, first I produced dollar figures to show how moving from 3:1 to 2:1 workers to retirees results in a 50% increase. No percentages of percentages at all.

Second, to move from 18% to 30% of GDP is a 67% increase in tax revenues whether you use the percentages, or the $$. Just as, going from tax revenues of $1.8 trillion to $3.0 trillion is a 67% increase. Which is the way it's going to be seen by the individuals who face the new taxes (which they will take steps to avoid).

Third, can you really believe that you can get 12% of GDP by taxing dividends? Wouldn't that be about 100% of corporate profits?

[Jim English]

"Calculating percentages of percentages will often give you numbers greater than 100% or less than zero, and is always a bad way to present this kind of figure."

I'm sorry but I believe this is mathematically impossible. A percentage generally refers to a value between zero and one hundred (unless dsquared believes that the government can tax us at 120%). A percentage of a percentage is also going to be a number between zero and one hundred. Never greater than one hundred and never less than zero.

[aaron]

Your quick calculations is wrong. The year is 2045, you should use $1000 for 40 years then $6500 after that. The break even point is between 2098 on 2099, that's over 53 years of living past 67 (I'll be 67 in 2045) I'd get before taking a loss (that implies an average life expectancy of 120yrs). If the size of the benefit cut also grew at 5% (don't think this is the case), the break even would be between 2081 and 2082; still wouldn't take a loss until I was 103.

[J Thomason]

"I'm sorry but I believe this is mathematically impossible."

Hypothetical example: I made 20,000 last year. This year I will make 50,000. My income increased 150% - basic math.

[aaron]

Oh yeah, if you go with your 30yrs of savings the break even is 2078/79. That's 33 years past 2045 before you'd take a loss.

If you only save 20yrs, break even is 2068/69. 23 years past 2045.

And if you only save for 10 years, you still don't take a loss until 2057.

[aaron]

That also assumes that your annual savings doesn't increase.

[Jeff]

If you put $1,000 a year away and earn 5% interest, you will have about $160,000 saved 45 years later. If you take out $6,500 (to match your loss in SS funds) you will have $153,500 left which will earn $7,675 in interest (at 5%) in year 45. This leaves you with $161,175! You will be able to have your "full social security benefit" forever and still leave you heirs with a sizable inheritance! If include interest you can put away as little as $450 per year and still beat social security 15 years after retirement.

[Jim English]

"Hypothetical example: I made 20,000 last year. This year I will make 50,000. My income increased 150% - basic math."

In what way is that a percentage of a percentage? What does your example have to do with taxes? Can you tax at greater than a rate of 100%? How could it ever be less than zero?

Yeah basic math and basic English too!

[TallDave]

Nice post Jeff, I was going to point that out too.

Those of us in our 30s who obsess over retirement funding on Excel recognized instantly the numerous fallacies in Krugman's suggestion.

There is also a great article out there about Chile's privatization, which shows they did far better than they would have under Soc Sec.

[TallDave]

TexasToast,
Hehe, Krugman went to punch out his strawman, but broke his hand on steel instead.

dsquared:
Hey, always nice to see a familiar face. Thought you made some good contributions at Lambert's on the Lancet debate.

[Andy Freeman]

> Another source of revenue? I could be missing your point but as you may recall in 2017 SS revenue is no longer in surplus and can no longer be used to mask the true size of the general fund deficit as it has been since the 1960s. Therefore, starting in 2017 or thereabouts general fund taxes will have to be raised to make up the shortfall both in the general fund

Spending cuts, more borrowing, and/or tax increases have to start the moment SS revenue starts dropping, even if at that moment SS revenue exceeds outgo. (Example: $100 govt spending, $25 covered by the SS surplus. When said surplus drops to $15, govt has to find $10 in spending cuts, more borrowing, or tax increases.)

[TallDave]

Jim, others:

What dsquared means is:

Say taxes now are 30%

A 30% raise in taxes means taxes are now 30% x (1 + 30%) = .3 * 1.3 = .39 = 39%

A 30 point increase in taxes means taxes are 30% plus 30% = 60%

I think his point was, for clarity's sake we should probably be explicit which one we mean.

[aaron]

TM said:

As to strawmen, I tuned out in the second paragraph with this:

Now [privatization supporters] are accusing their opponents of coddling the rich and not caring about the poor.

Huh? Maybe Tex can provide something to verify that.

I'll provide that. I support SS privatization and I accuse opponents of coddling the rich and not caring about the poor. The poor are screwed by SS because they have less disposable income available to pay down debt or invest to build wealth. The importance of increasing their ability to build wealth is especially evident now that we are a highly productive economy and given the decline in starting salaries after the tech boom (I like to call this the Job-Market Bubble Collapse). Increasingly there will be less jobs necessary to produce our national income. Without investment income from wealth, it will be increasingly difficult to improve ones standard of living.

[Jim English]

TallDave, others

So what?

[TM]

Your quick calculations is wrong. The year is 2045, you should use $1000 for 40 years then $6500 after that.

Well, Aaron is using "different" and "wrong" as synonyms, and considering how little we know about the suitability of the underlying assumptions, I don't know why one particular set of assumptions could be labelled "right".

However, in his subsequent examples, Aaron seems to be assuming that a person saves $1,000 per year from 2005 to 2014 at 5%, adds nothing to the balance but allows it to grow at 5% until 2045, then depletes it by $6,500 per year (while the remaining balance continues to grow at 5%.)

Which is interesting for folks retiring around 2045. Folks retiring sooner will have less time to save (and less of a benefit cut, presumably, but Krugman did not supply that number).

And the general point will stand - adjusting for the time value of money, it is a rhetorical sleight of hand for Krugman to imply that this is a bad deal. Well, he probably knew that, which is why he phrased it as he did.

[Jim English]

TallDave,

Don't get me wrong. I see what you're saying. It's just that being clear and accurate was exactly what I was trying to do.

[aaron]

Privatizing SS security simply indexes the benefits to our economic growth during a person's working life rather than that of the next generation. It would eliminate the problem of declining productivity growth causing shortfalls.

[aaron]

Sorry, it indexes benefits to economic growth during each person's entire life (including retirement years), not just working life.

[AF]

Tom, you misunderstood, or misrepresented, what Krugman wrote.

You criticized him for writing: "If the economy grows as fast over the next 50 years as it did over the past half-century, Social Security will do just fine." You pointed out that Krugman has said in the past that he does not expect the economy to grow that fast.

But that is perfectly consistent with what he wrote in yesterday's column when you read the whole paragraph:

"It's possible - not certain, but possible - that 40 or 50 years from now Social Security won't have enough money coming in to pay full benefits. (If the economy grows as fast over the next 50 years as it did over the past half-century, Social Security will do just fine.) So there's a case for making small sacrifices now to avoid bigger sacrifices later."

He never wrote that he expected the economy to grow as fast over the next 50 years as it did in the past. He merely said it is not certain that it will not.

[aaron]

The system also would provide a bonus to those who have loved ones that do not use their full benefit. As the majority gains wealth, this begs the question: In future generations, will there be Wealth Affirmative Action? Will there be a tougher job market for Trust Fund Babies?

[heh]

I think some are overlooking the effect the Baby Boomer's retirement will have on the stock market. If it is assumed that they will transfer their investments into bonds and other "safe" vehicles, then the economy needs replacement investors for the stock market. Of course I haven't seen much discussion of the effects on the job market either so...

[dsquared]

I disagree that the economy "needs" replacement investors on the stock market; the stock market could go to hell without it affecting the physical capital stock. The *stock market* might need replacement investors, but that's not the same thing as the economy.

[Ironman]

Speaking of Krugman's February column - the CEPR recently published a calculator they claim shows the impact of the President's proposed reforms upon benefits received under the system. They use the GDP-to-stock market return assumption as a means of misdirecting the users of their calculator from increasing stock market return "premium" in the tool to more realistic levels.

It has other problems, which I don't know if I'll get around to going into given the magnitude of its flaws stemming from this one single mistaken assumption, but you get the idea.

[Patrick R. Sullivan]

If the stock market went to hell, and investors expected it to be permanent, that would definitely affect the physical capital stock. Because, as it wore out, it wouldn't be replaced.

Tall Dave (and dsquared), if tax revenues go from $ 2.16 trillion dollars, to $ 3.60 trillion, is that a 12% increase, or a 67% increase?

[Neil]

Back then, anyway, the Earnest Prof understood that GDP growth came from both increases in productivity, and increases in the size of the work force. Since the work force is expected to grow more slowly over the next fifty years than formerly, GDP growth will also be reduced.

Aside from population, the major determinant of GDP is productivity as you point out, which is what Krugman is pointing to. The SSA actuaries are using the anemic productivity numbers of from the 1960's to 1990's in their calculations, which are half the values of those during the past decade or so. Though working age population will certainly decrease, this is to be made up by a commensurate increase in productivity. At the same time, returns on conservative assets in the future, if productivity is to resemble that 1960-1990 timespan and working age population decreases, cannot possibly provide the types of returns that are being promised by privatizers.

So, in short, you state correctly that economic growth comes from both increases in productivity and workers. Again, you correctly point out that population is slated to decrease. But then, you jump the gun and say that this will mean decreased levels of GDP growth, saying nothing of the fact that productivity is on the rise and near double what it was during the period used in most actuarial predictions for SS.

[aaron]

heh,

Retirees will eventually begin spending the money that will turn into earnings for stock holders (but there will be a lag, there's a good possibility that volume and prices will fall for a period), P/E will decrease attracting new inverstors and increacing the rate of return on people currently saving.

Basically I think, prices will start to reflect realistic returns rather than expectations. I also think stock market returns will eventually become more correlated with GDP and more stable. Speculators who move large amounts of cash into the market at one particular time could take a hit or make a windfall, but people who have been investing income for retirement will be fine because of the distribution of their investments over time. The people selling low should be people who bought low.

I guess that's not necessarily true since people whose investments were done mostly over a platue (starting after a period of unussually high investment growth). Like if a very large group of wealthy investors correctly speculated on demographic changes before retirees began investing in stocks with the intent of selling before the majority switched to bonds to screw over a very specific group of retirees and retirees all transistioned to bonds at the same time despite the rise of bond prices and fall of stock prices.[/sarcasm]

[TM]

Tom, you misunderstood, or misrepresented, what Krugman wrote.

What are the odds?

Did any read what he wrote about likely future growth and come away with the notion that the most probable outcome is lower growth over the next fifty years? OF COURSE lower growth is possible, as is higher growth - my impression of this paragraph is that he is encouraging the reader to think that lower growth is *not* the most likely outcome.

Which would seem to be exactly the opposite of what he argued when he was exposing the problem of low stock future market returns last Feb.

Fortunately for his acolytes, he wrote with enough caveats that they can now argue that Krugman's position in February was ambiguous, just as it is now. Whatever.

He never wrote that he expected the economy to grow as fast over the next 50 years as it did in the past. He merely said it is not certain that it will not.

Fine. Then you will surely agree with me when I write that it is not certain that Krugman is a lying weasel.

It is also not certain that he is a not a pedophile. And it is not certain that he will remain unindicted for insider trading.

[dick]

Neil,

Granted that GDP will increase. However, if there are fewer people to pay the SSA and the limit remains as to the amount subject to SSA, then the gross available for SSA would decrease regardless of whether the GDP grew or not. However, if the GDP grew and the population had private accounts, then the amount available to the population would increase because the private accounts would increase. Or am I even stupider in math than I thought.