Friday, February 04, 2005

More on real SS reform

It seems I'm not the only one utterly unimpressed by Krugman, a "columnist" for the NYTimes, and his "analysis" of social security.
Response to Paul Krugman’s Op-Ed, “Many Unhappy Returns,” in the New York Times February 1, 2005 by Jeremy J. Siegel, Professor of Finance, The Wharton School

Paul Krugman claims that social security privatizers are caught in a Catch 22: If stocks, the bedrock of the privatization schemes, are to yield good future returns, then economic growth will be good enough to make our Social Security System solvent without personal accounts. Yet supporters of personal accounts maintain that the pension system will be in crisis because of slower future growth. This suggests stocks will not yield good returns and, following Krugman, the case for personal accounts collapses.

But conceding that economic growth will slow does not mean we should forsake either personal accounts or equities. Let us accept all Krugman’s assumptions, including that future real growth in the US falls to 1.9% per year. If we add this pessimistic growth rate to the current 3% yield (dividends plus buybacks) on stocks, we get nearly a 5% real return on equity. Although this is not as high as the 6.5% to 7% historical real returns, it is still much higher than the real returns that are offered by bonds currently bought by the Social Security Trust Fund, which now yield well below 2%.

But capturing the higher return from equities is not the most important reason to favor personal accounts. Despite government language that calls social security taxes “contributions,” workers see little connection between the taxes that they pay and the benefits they receive. Survey after survey indicate that a very small percentage of young workers believe Social Security system will even exist when they retire. Personal accounts will help restore trust in the system by lowering payroll taxes, raising after-tax wages, and allowing workers to retain ownership of the income they rightfully earn.

The crux of the coming pension crisis is that there will be too few workers supporting too many retirees. We need to do as much as we can to encourage workers to enter and remain in the labor force. Reducing payroll taxes by establishing personal retirement accounts cannot but encourage these workers. Certainly this will not by itself eliminate the crisis, but lowering payroll taxes is a step in the right direction.

Furthermore, equity returns need not follow U.S. growth downward. Although growth in the developed world will likely slow in the coming decades, the growth in the rest of the world is accelerating. The booms in China and India are already creating a new class of investors who are using the dollars they earn from their exports to buy our assets. Despite the growth slowdown in the aging developed countries, the future for the world equity markets and those firms that take advantage of this global growth is extremely bright.

Finally, there is agreement among both Democrats and Republicans that Americans save too little. What better way to motivate saving than by allowing workers to see that part of their pay growing over time in personal accounts dedica
Private accounts lower tax rates by making a transfer, a tax, defered consumption. This, by themselves, makes it a good idea.

Private accounts do not fix social security, that must be done through some combination of a tax hike and benefit cut. I'd like to see more benefit cut and no tax hike -- let the current shortfall be covered by debt and higher interest rates (which spread the cost most evenly).


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