Posted on Thursday, February 3, 2005 - 7:23 pm:

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Many Unhappy Returns

The fight over Social Security is, above all, about what kind of society we want to have. But it's also about numbers. And the numbers the privatizers use just don't add up.

Let me inflict some of those numbers on you. Sorry, but this is important.

Schemes for Social Security privatization, like the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.

To explain why, I need to talk about stock returns. The yield on a stock comes from two components: cash that the company pays out in the form of dividends and stock buybacks, and capital gains. Right now, if dividends and buybacks were the whole story, the rate of return on stocks would be only 3 percent.

To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.

But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible.

The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years.

In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.

The price-earnings ratio - the value of a company's stock, divided by its profits - is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return?

I asked Dean Baker, of the Center for Economic and Policy Research, to help me out with that calculation (there are some technical details I won't get into). Here's what we found: by 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100.

In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.

Social Security privatizers usually defend their bullishness by saying that stock investors earned high returns in the past. But stocks are much more expensive than they used to be, relative to corporate profits; that means lower dividends per dollar of share value. And economic growth is expected to be slower.

Which brings us to the privatizers' Catch-22.

They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.

It really is that stark: any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black.

And I suspect that at least some privatizers know that. Mr. Baker has devised a test he calls "no economist left behind": he challenges economists to make a projection of economic growth, dividends and capital gains that will yield a 6.5 percent rate of return over 75 years. Not one economist who supports privatization has been willing to take the test.

But the offer still stands. Ladies and gentlemen, would you care to explain your position?

Originally published in The New York Times, 2.1.05

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Posted on Thursday, February 3, 2005 - 9:57 pm:

January 05, 2005
The Social Security Party Line: Talking Points

I figure I might as well lay down what the party line is on Social Security:

Social Security Talking Points

Social Security's Troubles Are Smaller than Our Other Fiscal Problems

* The projected long-run Social Security Trust Fund deficit ranks no higher than fourth in urgency and in size on our list of fiscal problems.

* Bigger fiscal problems include:
o The current $600 billion a year General Fund deficit.
o The long-run problems of finding financing for and controlling the growth of rapidly-rising Medicare and Medicaid spending.
o The need to make sure that the General Fund has the resources to meet its commitments without undue strain after 2020--when it will no longer be able to borrow from the Social Security Trust Fund.


* If our current General Fund deficit is like having an impaired driver who has just crashed us into a tree, and if the Medicare-Medicaid problems are like a melted transmission, and if the post-2020 General Fund is like having no brake pads left, then our long-run Social Security deficit is like a slow tire leak.

* If our Social Security problems are neither extraordinarily urgent nor extraordinarily large, why is the Bush administration so focused on them?
o Possibly because of incompetence: George W. Bush and his inner circle simply do not understand the magnitude and importance of the federal government's other fiscal problem.
o Possibly because of ideology: it is for some reason important to undermine the successes of FDR's New Deal.
o Possibly because of capture: just as the principal aim of the 2003 Medicare Drug Benefit bill as it was written was to boost pharmaceutical company profits, so when the Bush Social Security proposal emerges we will see that its principal aim is to boost Wall Street profits.
o Which of these is really the most important reason? I don't know. Your guess is as good as mine. Certainly the public rationales the Bush administration has offered for the "reform" program it has not announced are extremely thin.


What Should Be Done to Fix the Social Security System?

* Minor adjustments--the kinds of things that you do to fix a slow leak in a tire:
o Pump in more air--raise Social Security taxes a bit (perhaps by applying the FICA tax to all earned income, rather than exempting income over $90,000 a year from the tax).
o Patch the leak--raise the retirement age as life expectancy increases.


* Make these minor adjustments automatic and ongoing:
o We will have good and bad news in the future, and will be making further adjustments--both up and down.
o This Congress and George W. Bush have demonstrated an inability to make economic policy in the national interest--whether it's the train wreck of their budget deficits, the sinkhole of their corporate tax bill, the car crash of their steel tariff, or the current vastly exaggerated cries of "crisis, crisis."
o It's time [to] do with Social Security policy what Congress long ago did with monetary policy: adopt the Federal Reserve model.
o Seven Governors of the Social Security Trust Board appointed for fourteen-year terms with the advice and consent of the Senate.
o They then elect a Chair.
o Their responsibility is to adjust the retirement age (and, within narrow limits, the payroll tax rate) in order to keep the Social Security System solvent in expectation.


What About Private Accounts?

* Private accounts are a good idea--most Americans save too little, and, remember, Social Security is supposed to be a solid, secure base of retirement income which people can rely on no matter what.

* Social Security was never intended to be all of anyone's retirement income: everyone was supposed to have private pensions and personal savings as well.

* But private accounts funded by cutting Social Security contributions are a bad idea:
o Robbing Peter to pay Paul is in general not a good idea.
o Reducing the guaranteed Social Security income floor will turn out to be extremely painful for those who are on the downside of the risks inevitably borne by private accounts.
o The government-funded part of the retirement-income system as a whole needs more resources, not a shell game.


* A good system of private accounts would be very different than the game of three-card-monte the Bush administration wants us to play.

* Here is a good system of private accounts:
o Automatically--without your having to opt in--half of your tax refund up to $2,000 a year is invested in your private account in the federal government's low-overhead Thrift Savings Plan.
o If half your refund is less than $2,000, you can top off your investment in the TSP.
o If you wish, you can file a form and withdraw your this-year's contribution from the TSP and get it in cash now.
o Investments in the TSP accumulate tax-free.
o You can't get your TSP investments out until retirement--but your creditors can't get at it either.
o For low-income and medium-income taxpayers, your contributions to the TSP are supplemented by the federal government, which levies a surtax on incomes above $200,000 a year to finance the supplements.


* A good system of private Social Security accounts is automatic; administratively simple; administratively low-cost; well-diversified; and substantial.

"What party?" you ask. Ah, that *is* an interesting question...

Posted on Friday, February 4, 2005 - 8:46 am:

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NEW YORK (CNN/Money) - Bill Gross, manager of the world's largest bond fund, is criticizing President Bush's plan to privatize part of Social Security.

Gross, managing director at Pimco, called the argument about the solvency of Social Security "silly" and said it was an example of the president not focusing on more important issues, such as the budget deficit.

The president's argument for individual Social Security accounts is meant "to promote an agenda that has little to do with seniors and more to do with Bush, his ownership society, and ultimately his domestic legacy alongside the likes of Ronald Reagan and FDR," Gross wrote in comments posted on Pimco's Web site.

"Without a blockbuster of a program in his second term it is unlikely that Bush can go very far in the history books on the back of a paltry 3 or 4 percentage point tax cut for the rich," Gross wrote.

"Presto!" he continued. "We now have partial privatization of Social Security heading the agenda upon which the president intends to spend his well-advertised political capital."

But while the president says that will help fix Social Security, "the problem has more to do with demographics than the lack of ownership," Gross wrote.

Gross argued that it will take more than individual Social Security accounts to correct a projected shortfall and suggested the government should focus on cutting the budget deficit instead.

"Production can only come from employed workers and so the basic solution is to produce more workers, either through immigration or postponed retirement for the existing work force," he wrote.

"By reducing budget deficits now, and especially that portion of the deficit owed to foreign governments, we would be able to keep more of our domestic production within our borders and therefore available to senior citizens."

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Posted on Sunday, February 6, 2005 - 9:38 am:

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I Fred R. Profeta Jr., Mayor of the Township of Maplewood, on behalf of the Township Committee, do hereby recognize

PAUL SUROVELL

with thanks for his efforts in effectuating peaceful solutions, in bringing positive community change, and in anticipation of his future efforts and dedication to the Township of Maplewood.

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I cannot tell you how much it means to me, and to our organization, to be recognized in this great hall by this body, which is the primary link, the fundamental connection between the citizenry and our democracy.

I proudly accept this award on behalf of the hundreds of members of our community who have dedicated their time and energy to humankind's most cherished goal -- the goal of peace.

I want to mention several of the many supporters of South Mountain Peace Action who have made my efforts possible. This list is too long, so I can only mention a few -- Betty Duffey, Mary Gallagher, Dan O'Flaherty, Theo Buklad, Nathalie Bailey, Cathy Casriel, Andrew Gyory and my wife, Judi Kramer. And I want to mention Bill Hildebrand who will be 90 in a week, and the late beloved Durward Branigan who gave so much for so many years. And most of all, I want to mention 12-year-old Jackson Roberts, whose elegant sign and message -- Be About Peace -- graces the lawns of so many homes in our community.

But -- and perhaps most important -- I also want to recognize those members of our community who share our commitment to peace, but who disagree with South Mountain Peace Action and our positions. Because what makes Maplewood truly wonderful and truly remarkable, is the absolute respect we show each other even when we disagree. A respect which is founded on our mutual reverence for democracy.

And so I want to stress that the honor I'm receiving tonight is about democracy as much as it is about peace.

Thank you very much for this award.

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