Inventing a Crisis

[Ogie Oglethorpe]

Originally posted by GePap


When you quote soley from the Christian Science Monitor, I might give a crap.

You gonna pony up for my subscription?

[GePap]

No, so there

[Drake Tungsten]

I wish I could find the article that pointed out how Krugman has been completely wrong on every major economic issue since the 1970's. I never understood how big a hack he was until I read that wonderful piece of work...

[chequita guevara]

I've read several of his earlier works, and he was pretty on target regarding future trends.

[Tingkai]

Dan S:
As Krugman points out, there is no crisis, the sky is not falling and there's no pressing need to change the US social security system.

Under the Bush plan, people will stop paying money into social security and instead invest it. But, the social security requires a steady stream of money to finance current payments. If the stream is disrupted, the US government will have to borrow money to finance the current social security payments. That means a massive increase in the US federal deficit, one that will exist for decades.

If the US government had a surplus, then this would not be that big of a problem, but with the existing deficit, the Bush plan will lead to higher interest rates and a much lower dollar. Other countries would be even less willing to finance the US gov't deficit. If that happens, even more pressure will be put on US interest rates. The higher interest rantes will lead to a recession.

This is simply the wrong time to start Bush's plan.

As for the poor, the Bush plan wrongly assumes that most people understand the financial markets and are capable of making wise decisions. That is not the case, and this is particularly true of the poor who are generally less educated. Even educated people make poor investment decisions. Look at the Enron employees. Most of them invested heavily in Enron and ended up losing their life savings when the company collapsed.

There are ways of privitizing the social security system, but it involves forcing people to invest in specific financial instruments. For instance in Hong Kong, I have to pay up to about $250 a month into a mutual fund and I can only choose between about six funds.

I doubt Americans would be willing to accept this system.

[DanS]

If the US government had a surplus, then this would not be that big of a problem, but with the existing deficit, the Bush plan will lead to higher interest rates and a much lower dollar. Other countries would be even less willing to finance the US gov't deficit. If that happens, even more pressure will be put on US interest rates. The higher interest rantes will lead to a recession.

All that would happen is that money would be taken from government bonds and put into assets paying slightly higher rates. The rate spread of corporate bonds and stocks over government bonds would decrease to correct for these cash movements. The government would have to pay more for use of people's money, but the impact on rates paid by the private sector would be minimal.

As for the poor, the Bush plan wrongly assumes that most people understand the financial markets and are capable of making wise decisions. That is not the case, and this is particularly true of the poor who are generally less educated. Even educated people make poor investment decisions. Look at the Enron employees. Most of them invested heavily in Enron and ended up losing their life savings when the company collapsed.

What Bush plan have you looked at that proposes a wide range of investment choices? The serious proposals floating around assume investing in index funds and giving the investee only limited allocation options or no options at all. We already have a very successful example of this limited choice, extremeley low administrative cost system for some federal employees, the Thrift Savings Plan, which has 5 fund choices.

http://www.tsp.gov/rates/fundsheets.html

The administrative costs of the Thrift Savings Plan are .1% of assets per annum.

[mrmitchell]

What's funny is that when it's 2050 and Social Security has been thoroughly destroyed and is little more than a program where the government manages the insanely rich's retirement pensions, it's likely the ones that were bagging on it in this thread will be the ones out cold on the streets in rags with not a penny to their name.

[Drake Tungsten]

it's likely the ones that were bagging on it in this thread will be the ones out cold on the streets in rags with not a penny to their name.

I see no factual support for this assertion...

[mrmitchell]

I feel sorry for you. I doubt those guys sitting on street corners with cardboard and felt marker signs will be treated near as good in 2050 Japan as 2050 America.

[Dinner]

Originally posted by DanS
How so?

Gee, let's do the math shall we? I poor 55 year old janitor is looking forward to retiring in the next decade. He doesn't have much other then a small pension and the value of his modest house but he feels that between his pension and social security he should do fine.

The problem is Bush succeeds in privatizing part of social security so that large numbers of young people opt out of the system. Now there is very little money being paid into social security but there are still over one hundred million retired people or middle aged people who will retire all to soon. With so many costs and so little income the government has no choice but to slash benifits for people like our janitor. Now, he can't afford to pay for both food and medical care where as before he was at least treading water.

Bush's plan will result in millions of people who are to old to opt out of the current system being stuck on a sinking ship as more and more cuts take place because there simply isn't enough money. I for one don't want to betray the elderly.

[DanS]

Gee, let's do the math shall we?

OK, but where's the math in your post?

If you want to talk math, how about correcting your math on the first page, since it was, as I pointed out to you, seriously FUBAR?

[Dinner]

It's conceptual. Lots of money out + little money in = big cuts in social security and homeless old people.

Allowing the young people who foot all the bills to opt out means we have most of the income disappearing and the crisis starts immediately instead of 20 or 30 years from now.

[Dinner]

Originally posted by DanS
OK, but where's the math in your post?

If you want to talk math, how about correcting your math on the first page, since it was, as I pointed out to you, seriously FUBAR?

My understanding is that Bush wants to allow people to save 3% of their social security payments not 3% of income.

[DanS]

The difference in benefits versus contributions would flow through to the deficit. The government would borrow from the market at x% interest rate and the private accounts would accrue interest at x+3% interest rate. The system would be better off financially, even if the federal deficit looks ugly in the short term.

Indeed, you could probably convince the people who are getting the x+3% interest rate to defray some of the transition costs from the extra 3 percentage points that are accruing to them. I would take that proposition in a heartbeat.

[DanS]

My understanding is that Bush wants to allow people to save 3% of their social security payments not 3% of income.

Your understanding is wrong.