January 11, 2005
#172: a bare-knuckles political brawl
KRUGMAN TRUTH SQUAD
Paul Krugman is like a guy with a recording of just one song. All he can do for variety is turn up the volume. In The Iceberg Cometh (01/11/05) he turns it up just about all the way. However, his message is the same: Bush is creating a massive problem by trying to solve a non-existent or minor problem. He's said this all before and we've responded to it all before, so we thought it might be interesting to discuss in this report why Krugman's position is going to lose politically.
Once again Krugman and the Democrats have "misunderestimated" the president. This is how we think Bush is going to win:
First, he's going to neutralize the older workers in their fifties and up by assuring them that absolutely nothing will change regarding their Social Security benefits. This may not mollify the AARP completely, but it will certainly make their opposition seem rather pointless.
Second, with the older folks off the table, Bush will turn to younger workers knowing two things:
A substantial majority do not believe SS will be there for them when they retire, and A substantial majority believe private accounts are a good idea.
To complete the deal about all Bush has to do is convince them that they trading away a benefit they don't believe they'll ever receive for a private account that they will actually own NOW. He will have to phrase this point delicately, but it seems like a no-brainer to us.
The financing piece may be a little more difficult to promote since some borrowing will be necessary to pay for the much discussed transition to private accounts, i.e., if payroll taxes are to be diverted from the Social Security income rate (pay in) to build private accounts, then government securities must be issued to maintain the cost rate (payout). See the chart in Squad Report # 171. This will give rise to no end of demagoguery by Krugman and the Democrats about Bush's fiscal irresponsibility.
What Bush has to do here is point out that if the government kept their books correctly there would be no de facto increase in total debt because of private accounts. That is, if the entire unfunded obligation of Social Security were recognized for what it is – debt – then the transition cost is a wash, i.e., zero, because the debt incurred to fund private accounts simply replaces dollar for dollar the implied debt of the total unfunded Social Security liability. Anyone who has refinanced a home recently to gain a lower mortgage rate should pick up on this reality rather easily.
Finally, and possibly most important, this is going to be a bare-knuckles political brawl.
The Democrats seem to have forgotten what a human battering-ram the president can turn into when he really wants something. When he hits the road and starts selling his reform ideas against an opposition, including Krugman and Co., whose biggest idea is to do nothing, we expect the tide will begin to turn. When it does turn, there are several red state Democratic Senators with elections coming up whose butts will be hanging out pretty far. What will they do to avoid the fate of Tom Daschle, the "great obstructer?" Probably cut a deal.
Anyway, it should be fun to watch and hear. And may take a dog whistle to measure Krugman's shrillness as defeat approaches.
[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]
Posted by John Weidner at January 11, 2005 09:57 PM
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Hi -
There's yet another aspect that you haven't covered: regardless of ideology, demographics point to the need of converting from a transfer-payment system to a capital-based system.
Social security was set up as a transfer system. People currently working pay for those in retirement. If the demographics work, then there is a surplus.
Looking at Germany, where I live, the system doesn't work anymore: it is effectively bacnkrupt and is now siphoning off monies from gasoline taxes in order to cover shortfalls in payments into the system.
If President Bush gets this through, he will be remembered in 40 years as the guy who saved the American political system. Otherwise in 25 years politicians will drive the system bankrupt when they realize that the retired electorate is the key to maintaining political power and that controlling the level of pensions will provide the needed leverage to ensure that the system, although failing, will perpetuate itself until failure.
John
Posted by: John F. Opie at January 12, 2005 07:50 AM>>First, he's going to neutralize the older workers in their fifties
Already there. I've sort of figured 30 years ago that I was working to pay for my dad's generation Social Security and there would be nothing left when I retire (in the next 10-15 years). Unfortunately my retirement 401K and IRA took big hits during the dot.com meltdown and market crash in 2000, lost about half. So wife and I are scrambling for alternatives. One source of inspiration is the book: "The Pig and the Python : How to Prosper from the Aging Baby Boom" by David Cork, Susan Lightstone.
I would love to see KidSave implemented for my grandkids.
from http://www.heritage.org/Research/SocialSecurity/EM899.cfm
In this country, a bipartisan proposal in 2000--sponsored by former Senator Robert Kerrey (D-NE) and cosponsored by Senators Rick Santorum (R-PA), Charles Grassley (R-IA), and John Breaux (D-LA) and former Senator Daniel Patrick Moynihan (D-NY)--would have made that decision much easier by creating "KidSave" accounts as a first step toward providing retirement security for future generations. Congress should revive the Kerrey proposal as a way to encourage all Americans to begin building nest eggs for their futures.
How KidSave Would Work
Under Senator Kerrey's original proposal, at birth, every American child would receive a loan of $2,000 from Social Security to open a KidSave account. After 2005, the amount would be indexed annually for inflation. The funds could be withdrawn only at retirement or after the account owner's death. Even if no other money is ever added to the account, the $2,000 initial loan could grow to more than $50,000 by the time the child retired. The nest egg could then be used for such things as increasing retirement income, sending a grandchild to college, starting a small business, or making a donation to a church or community organization.
This money would be invested through the Thrift Savings Plan (TSP), which helps federal employees invest for retirement. The TSP currently offers three safe and low-cost investment options: a stock index fund, a corporate bond fund, and a government bond fund. Under the proposal, the parents or legal guardians of under-age citizens would choose one of the investment options. In addition to the base loan of $2,000, parents would be allowed to deposit up to $500 annually in each child's account until the child is 19. Part of the $500 could also come from grandparents, who would be allowed to roll over money, tax-free, from 401(k) or similar retirement plans.
When the account owner reached the age of 30, the initial loan would be repaid without interest in five equal annual installments. However, the account owner would repay an inflation-adjusted amount. In other words, if the $2,000 initial loan had increased to $3,500 in inflation-adjusted dollars over the 30 years, the owner would repay $3,500 in five equal annual installments.
Sounds like a good idea to me. Too bad it didn't pass. The link above will let you read the whole article.
There are a whole bunch of "Social Security" research at the Heritage Institute. You can see the index of articles at: http://www.heritage.org/Research/SocialSecurity/
Bob Durtschi
John Ople
That's why we keep harping on the dependency ratio. As it falls to 2 workers per one retiree in 25 years, the current system is unworkable. That's why Krugman won't touch the "ratio." It's the "third-rail" for liberals.
Bob D.
We like the KidSave approach. It helps people to become free of government programs. Free people are the Krugster's nightmare. Don't need government? Are you crazy? Then who would need me?
KTS
Posted by: KTS at January 12, 2005 07:06 PM
