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Old 05-15-2009, 10:32 AM   #61
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First of all a 2% return a year is crap that doesn't even keep up with inflation. Second, a 1% a year increase in the working population of the US has to be netted against the change in post retirement life expectancy. The next problem exists in that the government engages in uniform treatment. So, if revenues drop temporarily they will take on debt at higher interest rates. Then the system has to derive revenue from some place else otherwise it will just compound.

Asset growth is a far superior system.
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Old 05-15-2009, 11:18 AM   #62
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First of all a 2% return a year is crap that doesn't even keep up with inflation. Second, a 1% a year increase in the working population of the US has to be netted against the change in post retirement life expectancy. The next problem exists in that the government engages in uniform treatment. So, if revenues drop temporarily they will take on debt at higher interest rates. Then the system has to derive revenue from some place else otherwise it will just compound.

Asset growth is a far superior system.
In my example "real wages grow at 1% per year". The use of the word "real" in this context generally means "after adjusting for inflation". So yes, I was claiming that the IRR would exceed inflation by 2%. (If you prefer, I could change the wage growth to 4% nominal - which whould be 1% real plus 3% inflation. In that case, the paygo system would provide an IRR of 5%, and the first three percent would be the inflation offset. The numbers work either way.)

You are correct, we need to be careful about changes in post retirement life expectancy. If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit.

I am not claiming that a PAYGO system can provide a better IRR for each generation that it provided for the prior generation, just that it can be equal if the economic growth rate is equal. In this example, they need to adjust the retirement age by a few years to maintain the ratio of working/retired and therefore get the same IRR as their grandparent. You are claiming that each generation must do worse than the prior generation, eventually getting -100% return. You haven't explained why you think that.

(Maybe I could communicate better if I use the P word. Ponzi schemes are doomed to fail because they promise IRRs that exceed any possible rate that they could add new members. If a Ponzi scheme only promised an IRR equal to the rate that it can add new members, it could last forever.)
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Old 05-15-2009, 11:30 AM   #63
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1/3 is the change in the system under private accounts. Currently 12% of payroll goes to SS. Under private accounts 4% would go to your private account. The other 8% goes to continue paying current retirees. 1/3 is the drop of revenues that the current system will get if people elect to opt out. But they eventually get a 100 percent in drop in cost, so the 1/3 drop is worth it. Would you pay 1/3 current cost to wipe out 100 percent of future liabilities? I would. What you are talking is about the track of ss that it is heading in. I'm referring to the change is systems.

......

"If "a little bit of extra debt" would actually make big progress on dealing with SS, I'd probably be for it."
Do you get what I'm trying to say to you, that the best way to get this cleared up is to have a replacement system on the back end(where future retirees opt out of the current one). If you have a replacement system, some debt during the interim period is fine.
I understand that you've seen a proposal somewhere that has 4% of wages going into private accounts. Your earlier post seemed to say that you thought SS had a current surplus of 4%. Have we reached an agreement that SS is currently using almost all the tax money to pay benefits?

You haven't specified when and how benefits are reduced. In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now. The borrowing occurs while we are waiting for the benefit reduction to occur. I gave you the projections of the current program so that you could make an estimate of how much would need to be borrowed. For example, if everyone opts for private accounts, then revenue will immediately drop by 4% of covered wages.

(You need to allow for the fact that the 12% you quoted is for the whole SS program including Disability. Note that the tables I linked were for the OASI portion only, which gets 10.6% of earnings. If you use 1/3 of 10.6%, then it's easier to use the tables for estimates.)

You have referenced "they" a number of times. Apparantly, you've seen something that impressed you. But, you also seem to be very fuzzy on some pretty important details. You called Bush's commission "pathetic", so I'm guessing it's not any of their proposals. Am I correct that you've looked for a link but can't find one?
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Old 05-15-2009, 12:29 PM   #64
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"Have we reached an agreement that SS is currently using almost all the tax money to pay benefits?"
There was never a disagreement in that regard.

"In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now."
This is correct, but it is still a good deal because you are taking a 33% decrease in revenues for a 100% decrease in liabilities/future cost. That is a good deal on the government side and the fact that the money can be invested actually makes it a good deal for the individual, too.

"You haven't specified when and how benefits are reduced."
I have given my suggestions in previous posts, and I also stated that benefits reductions would have to be a separate bill than the private accounts. You try to do both and for sure nothing will pass.

"I gave you the projections of the current program so that you could make an estimate of how much would need to be borrowed."
This is pointless because some of the shortfall could be made up in reduced benefits, some of the shortfall could be made up with budgetcuts elsewhere and a shift of money from one side of the budget to SS, and then after that you take on a portion of it in debt, but that only makes sense if you come out on the other side with a lot less costs.

"For example, if everyone opts for private accounts, then revenue will immediately drop by 4% of covered wages."
That is correct or 1/3 of SS revenue.

"If you use 1/3 of 10.6%"
Actually you are correct it would be just over 40% which would mean that the numbers for the private accounts are slightly better than my numbers provided above in comparison to the current system. But this one is only on the performance side, its not on the revenue side. For the revenue side you would still use 12%.

I called the entire attempt to market and explain this bill as pathetic. They got destroyed because the average American didn't understand it. It is a political reality that if the GOP wants to pass a bill on SS they have to bring in AARP to collaborate in exchange for their support. AARP will be reasonable they are not a liberal group they just want to help write the bill so that their current members don't get screwed.

"Am I correct that you've looked for a link but can't find one?"
I don't need to, I remember getting the specifics when the bill was introduced. Common sense says that buying off a future liability at a fraction of the cost is common sense. And if it benefits the other party to, then it is a win, win and a no brainer. The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.
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Old 05-15-2009, 12:48 PM   #65
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"If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit."
You got this completely backward because you already went against your paygo. In order for the system to remain in balance you would have to lower yearly annual benefits as people lived to be older. Higher benefits for less years, or lower benefits for more years, think like an annuity actuary once. People live longer and the benefits will go down precipitously.
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Old 05-16-2009, 09:07 AM   #66
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"In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now."
This is correct, but it is still a good deal because you are taking a 33% decrease in revenues for a 100% decrease in liabilities/future cost. That is a good deal on the government side and the fact that the money can be invested actually makes it a good deal for the individual, too.

....

"Am I correct that you've looked for a link but can't find one?"
I don't need to, I remember getting the specifics when the bill was introduced. Common sense says that buying off a future liability at a fraction of the cost is common sense. And if it benefits the other party to, then it is a win, win and a no brainer. The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.
Okay, I think Iím getting it. You see a concept that is so powerful that the details donít matter. The first part of the concept is that an advance-funded public retirement system is vastly superior to a pay-as-you-go system. The common response to this is ďEven if advance funding were better, the transition costs are too high for us to change.Ē You have the 33/100 solution: We say to everyone below age XX, ďWeíll put 4% of your wages into an individual account. In exchange, you give up 100% of your SS retirement benefits.Ē

From your perspective, this is a win-win deal. The govít is better off, even if it has to borrow all the money going into the individual accounts. The reason is that borrowed money, accumulated with interest at Treasury rates, will still be less than the SS benefits that arenít paid.

At the same time, individuals are better off because they will put the money into stocks. The accumulated balances in their accounts when they retire will be more than the SS benefits they give up.

Do I have right concept?
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Old 05-16-2009, 09:19 AM   #67
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Thats pretty much it.

Keep in mind the decision of what system to participate in is optional, but I'd opt into the private accounts if it was me. I think most of America would, and eventually practically everybody. The Chileans have the choice, too. 99.9% of the public elected the private pension system. Initially it was like 60%.
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Old 05-16-2009, 09:26 AM   #68
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"If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit."
You got this completely backward because you already went against your paygo. In order for the system to remain in balance you would have to lower yearly annual benefits as people lived to be older. Higher benefits for less years, or lower benefits for more years, think like an annuity actuary once. People live longer and the benefits will go down precipitously.
Maybe I mis-interpreted this statement

Quote:
"If we put in place a mechanism to match income with payments, there's no reason it the system can't continue indefinitely."
You are correct about that it would continue into perpetuity, but the return on investment would erode overtime. Until the system after long enough time period(I am fully aware that it could take 250 years) gave out next to nothing in the form of payments. You can't fight the laws of compound interest. Either you are taking on more future debts/liabilities than revenue or you are taking on less future debts/liabilities than revenue. One leads to insane wealth and the other leads to eventual collapse(if you give it enough time).
I saw the phrase "return on investment" and started thinking about IRR. Maybe you were focusing on "next to nothing in the form of payments".

Let's clarify. I said "A paygo system can continue indefinitely, giving each cohort of workers an IRR equal to the growth rate of total covered wages." You seem to be disagreeing, but do you mean A, B, or C?

A) Independent's statement is false, even if mortality rates are constant.
B) Independent's statement would be true if mortality rates were constant, but it becomes false when mortality rates are falling.
C) Independent's statement is irrelevant because IRR is irrelevant. "Success" means that monthly payments remain the same, even if people are living longer.
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Old 05-16-2009, 09:42 AM   #69
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The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.
Yep. We've never experienced any problems with default and risk swaps. There are plenty of strong, private insurers out there capable of insuring against the risk of default for the pension accounts of tens of millions of people. Or, the government could insure against bad market results--I was just telling someone that is what we need right now, more public subsidies for private risk taking.

We have IRAs, 401Ks, and the ability to save outside these programs for our individual retirement. SS should be recognized and accepted for what it is--a wealth transfer program that assists the aged and permanently disabled at the expense of everyone else. It helps the poor far more than others. Through it, middle-class people who saved absolutely nothing in individual accounts will still receive a monthly check that prevents privation and keeps them off the (other) public dole programs. That's it. Those who want to "supercharge it" so that it can provide the majority of the income for a middle-class retirement should realize that they are inviting more, not less, government control of more Americans and more government entanglement with the US financial market--assuming the government will be providing a safety net under this whole thing. Will the "private" program really allow 80 YO Mr Smith to put all his money into American Styrofoam Lawn Ornaments, Inc? If the government (you and I) are underwriting the market risk for these accounts, you can bet there will be limits on types of investments. More government review, committees, approvals, etc. Nope--just keep SS as limited as possible and let the rest of us tend to our affairs, thanks.
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Old 05-16-2009, 09:55 AM   #70
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B!

But there are more problems than that. Natural changes in the situation causes mismatches between revenues in costs. For example, an economic downturn causes revenue to drop. Under true Paygo you would have to drop the payments so you wouldnt go into deficit. But that wouldn't be "fair". If you tried to make payments uniform the deficit created during times like these would cause the system to rise. Once the system went back into equilibrium the revenues still coming in would still have to be dispursed meaning that there wouldn't be anything to pay off the debt unless you cut future payments which also wouldn't be "fair". There is also the flip side to this equation and that is what we are going through in the next few years. What if revenue is coming in just fine, but your costs due to a higher population in this generation(baby boomers) are higher. Do you cut this generations benefits to make sure revenue meets payments? Many people would deem this to not be "fair". Or do you take on deficit and cut future payments to pay of the debt? This could also be construed as not "fair".
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Old 05-16-2009, 10:32 AM   #71
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Samclem you don't get my position at all. I'm not saying that we "supercharge it". I am agreeing that it should a retirement system for only the poor and lower middle class(why I support means testing). I'm not suggesting that either the current system or a private account system should be a majority of an individuals retirement(unless you were already extremely poor and pretty accustomed to eeking out an existence). It clearly would lead to less government involvement into the markets. It wont allow an 80 year old to invest in equities, I believe it was in a persons early 50s that they would start being forced into more conservative investments. This is small portion of a persons money and they will be able to invest all their other money as they please. The current system is much more intrusive. The regulations on the accounts will be pretty basic and probably wont be much different than how they regulate qualifed plans(like 401ks where they ban shorting, etc.)

I said they were like credit default swaps, I didn't say they were the same thing. The insurance wouldn't carry that much risk on them because they are so long term in nature. You aren't insuring default risk here. Where's the debt for their to be default risk? You are insuring against underperformance. All the individual needs to do is average 4.75% return a year for over the course of their working life inorder for them to match the amount in the current system. So the insurance policy would only pay out the difference if the individual averaged less than that. These things do exist in the private market today, life insurance companies provide minimum guarantees on their life products. I've seen one company offer a 4%(2-3 is most common) minimum guarantee if lets say the market performed horrible for several decades, they would bump up your return. Its such a low probability that the cost is negligible.

It wouldn't be one insurer, there would at least be several. I would say that the government would guarantee the counterparty risk(like FDIC) not underwrite the risk. Essentially if the market had a worse crash then what we just went through, and the insurers couldn't makeup the difference in the private accounts the government would step in and liquidate the company paying off most of the insurance and the government would pick up the rest. This is no different than what they currently do under the PBGC if your company went under with your pension included. The odds of this happening to these insurers is highly unlikely probably not even once in a century. And I would rather the government foot a small portion of a small portion for one year than managing an entire ponzi scheme pension every year to the end of time.
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Old 05-16-2009, 10:51 AM   #72
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Samclem you don't get my position at all. I'm not saying that we "supercharge it". I am agreeing that it should a retirement system for only the poor and lower middle class(why I support means testing).
Here's the rub. Let's say they started very heavily means-testing SS. Presumably that could mean lowering FICA taxes substantially since you're only paying a fraction of the benefits out.

Older folks benefit because they'd almost certainly be grandfathered in, and no one receiving benefits today would likely lose them.

Younger folks benefit from many years of lower payroll taxes, meaning more they can save and invest for their own retirement.

People in their 40s and perhaps their early 50s would be screwed, after paying increasingly high FICA taxes for 20-30 years and then told they get nothing.

As someone in that "likely to be screwed" age group, I have obvious reservations about heavily means testing something we've paid into in good faith for 20+ years.
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Old 05-16-2009, 10:57 AM   #73
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Oh, and one more thought to add on to my post above: We could VERY easily engineer a "lower middle class" income for ourselves and be comfortable. We have zero debt, the house is paid for, it's cheap and modest with low taxes, utilities and insurance, and we live a simple life. We could probably live a pretty decent life with $30K a year. If someone tells me I can only collect if I get my income down to a "lower middle class" level, I'm likely to do so.

What I'm not likely to do is continue to "add value" to society as a productive taxpayer one second longer than I need to if you pull the means-testing lever too hard, and I don't think it's a good idea to discourage people from trying to earn more and pay more in taxes.
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Old 05-16-2009, 11:03 AM   #74
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"People in their 40s and perhaps their early 50s would be screwed, after paying increasingly high FICA taxes for 20-30 years and then told they get nothing."
You would do it on a sliding scale over several decades, but when you officially stopped "sliding it", you would want it down to only those that were in that were truly in the lower income range.
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Old 05-16-2009, 12:25 PM   #75
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Thats pretty much it.

Keep in mind the decision of what system to participate in is optional, but I'd opt into the private accounts if it was me. I think most of America would, and eventually practically everybody. The Chileans have the choice, too. 99.9% of the public elected the private pension system. Initially it was like 60%.
Okay, I think I understand how you get the win-win. Now I'll imagine Representative Smith who sees your SS changes and decides to run with the same idea.

Smith believes that Pell grants are the government's best program. He's always looking for a way to increase funding. So he introduces a bill that does this: First, the gov't issues $100 billion of new bonds and uses the money to buy stocks. (It picks exactly the same stocks as the Federal TSP "C" fund.) These bonds don't pay cash interest, the interest accrues inside the bonds. Then we wait. Since stock returns outrun Treasury bond interest, eventually the balance in the stock fund will be twice the balance owed on the bonds. At that point, we cash in half the stocks and pay off the bonds. The other half of the stocks become a permanent endowment supporting Pell grants. Rep. Smith points out that this is absolutely free money, it didn't cost the taxpayers a dime.

Maybe his colleague, Rep. Jones is a big fan of air superiority fighters (which happen to be built in his district). He copies Smith's idea to provide long term funding for fighters.

I think that Smith's idea is economically identical to yours. He is using the Treasury/stock spread to fund Pell grants, Jones is funding fighters, you are funding the transition to an advance-funded retirement system.

There are two differences in details. First, you will issue a new set of bonds for multiple years in the future. Maybe $100 billion in 2010, $110 billion, in 2011, ... $200 billion in 2018, etc. You will eventuall have $10+ trillion of bonds outstanding. Second, the stocks will be "owned" by individuals instead of the gov't, although their ownership rights may be limited. Neither of these differences is economically significant.

I'm a believer in the "no free lunch" school of economics. Maybe Rep. Smith's program appeared to be free money, but I think it's simply shifting money from one pocket to another. I wouldn't support his program without identifying the losers. I feel the same about yours. I'm thinking that the most likely losers are the taxpayers who pay the interest on the other federal debt, and savers who were planning to buy stocks outside the SS system.

(Note that Smith's program does not increase real capital investment in the US economy. The money that the gov't puts into the economy by buying stocks is exactly offset by the money that the gov't is taking out of the economy by borrowing.)
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Old 05-16-2009, 01:23 PM   #76
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There are major differences between your two items and private accounts for SS.

First, you are using the spread to get individuals to forgo 100% of the liability for only 40%. This is important and very different than your two examples. In your two examples there is no cost savings at the back end.

Second, the difference between individuals and the government directly investing in stocks is a huge one. Clinton actually proposed having the government doing the investing for SS back in the 90s. The problem who decides what companies to invest in? Is it the ones that provide you the most lobbying money? Do you think federal government can effectively manage that amount of money? They are forced into only buying large cap corporations which screws small businesses out of the money. I could keep on going with the problems with having the federal government investing all this money.

The best way to think about this stuff, is like a corporation. The federal government can feel free to take out all this debt and finance higher returning investments. This is actually usually best employed in lowering tax rates(because then you don't have the above problem). First, the more you do it the more treasuries will rise, eventually negating the returns. Also, what are you risking? You are risking what just happened to the UK and Iceland. Your government doesn't have enough access to credit when you need it and then your finished. That is why governments shouldn't tapout their debt because there is nobody to back them up(except maybe the IMF if your a small country). Governments need to be models of conservative behavior in terms of risk.

It isn't free money. The most productive use of money like this is to reduce taxes, but you are just compounding debt and pulling money out of the economy at the same time. Eventually the intersest rises until it goes negative and then the government is no longer a safety net against anything because it can collapse/fail.

"(Note that Smith's program does not increase real capital investment in the US economy. The money that the gov't puts into the economy by buying stocks is exactly offset by the money that the gov't is taking out of the economy by borrowing.)"
This is correct.

I can't put anymore thought into this one for a bit, I'm going to spend the rest of my day on a yacht.
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Old 05-17-2009, 12:01 PM   #77
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There are major differences between your two items and private accounts for SS.

First, you are using the spread to get individuals to forgo 100% of the liability for only 40%. This is important and very different than your two examples. In your two examples there is no cost savings at the back end.

Second, the difference between individuals and the government directly investing in stocks is a huge one. Clinton actually proposed having the government doing the investing for SS back in the 90s. The problem who decides what companies to invest in? Is it the ones that provide you the most lobbying money? Do you think federal government can effectively manage that amount of money? They are forced into only buying large cap corporations which screws small businesses out of the money. I could keep on going with the problems with having the federal government investing all this money.

The best way to think about this stuff, is like a corporation. The federal government can feel free to take out all this debt and finance higher returning investments. This is actually usually best employed in lowering tax rates(because then you don't have the above problem). First, the more you do it the more treasuries will rise, eventually negating the returns. Also, what are you risking? You are risking what just happened to the UK and Iceland. Your government doesn't have enough access to credit when you need it and then your finished. That is why governments shouldn't tapout their debt because there is nobody to back them up(except maybe the IMF if your a small country). Governments need to be models of conservative behavior in terms of risk.

It isn't free money. The most productive use of money like this is to reduce taxes, but you are just compounding debt and pulling money out of the economy at the same time. Eventually the intersest rises until it goes negative and then the government is no longer a safety net against anything because it can collapse/fail.

"(Note that Smith's program does not increase real capital investment in the US economy. The money that the gov't puts into the economy by buying stocks is exactly offset by the money that the gov't is taking out of the economy by borrowing.)"
This is correct.

I can't put anymore thought into this one for a bit, I'm going to spend the rest of my day on a yacht.
Iím not sure when youíll read this, but Iíll write it today anyway.

First, I want to be clear on the political issue with the govít owning stocks. I think the Rep. Smithís ďfree moneyĒ claim is wrong, even if there are no political problems with deciding which stock to buy. That may be an additional problem, but the idea fails even if he could find a perfectly non-political way to invest the money.

I think we agree on this: ďFirst, the more you do it the more treasuries will rise, eventually negating the returns.Ē Iíll try to put numbers on it. Smith may say that heís found $5 billion dollars by borrowing $100 billion and getting a 5% spread on the difference between stock and Treasury returns. Iíd note that the govít had $5 trillion of other borrowing outstanding. If Smithís $100 billion eventually raises the interest rate on this other debt by only 10 basis points, then the taxpayers are hit with an additional $5 billion interest cost on the other debt Ė exactly offsetting Smithís claimed profit.

Itís really more complicated than that. I mentioned individuals buying stocks after he starts his program as other losers. But, altogether, all the losses have to equal his claimed gains. Since he isnít doing anything to raise real productivity in the economy, heís playing a zero-sum game. All of the gains for his program have to come out of someone elseís pocket.

Thatís the key similarity between his idea and this SS transition proposal. In the SS case, we would tell young workers that they can continue working and spending exactly like they would under the current SS system. No increase in taxes, no drop in consumption. When they eventually retire, they will get the proceeds of their individual accounts instead of traditional SS benefits. Weíre guaranteeing they will have more money in retirement, and therefore can consume more economic goods.

But who will produce those extra goods? The proposal doesnít provide either more workers or higher productivity. The normal route to higher productivity is to consume less today in order to produce capital goods which will make us more productive in the future. But this transition involves no drop in current consumption, therefore no gains in productivity. If it provides more dollars to these workers when they retire, those dollars are offset by losses they (or someone) incurred elsewhere Ė probably higher interest costs on other govít borrowing and lower returns on stocks.

Note that the debt the govít is creating is not resulting in productive investments, itís simply sucking money out of the private economy at the same rate that itís putting money in. I canít see any gain in that.
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Old 05-17-2009, 12:25 PM   #78
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Since he isn’t doing anything to raise real productivity in the economy, he’s playing a zero-sum game. All of the gains for his program have to come out of someone else’s pocket.
At least in the abstract, it can be argued that the investments themselves can be expected to increase productivity. The flow of money (into equities or bonds) provides additional capital to industry, which can be used to enhance productivity (new physical plant, new machines, investment in R&D, investments in employee training, etc--all of which should increase productivity). Again, in the abstract, if a company isn't going to be using the funds to increase productivity or efficiency, it has no business issuing bonds or new stock. All real economic growth, wage growth, and ultimately long-term growth in stock prices depends on increased productivity, right? Neither stocks or bonds are a long-term zero-sum game, it is possible for everybody to win. Not so with stock options, which truly are zero-sum.

Or maybe I'm missing something.
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Old 05-18-2009, 03:33 AM   #79
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"The proposal doesn’t provide either more workers or higher productivity. The normal route to higher productivity is to consume less today in order to produce capital goods which will make us more productive in the future."
This is not true, statistically investment is the most beneficial to the economy and leads to higher productivity, more growth, and and more goods produced. The assumption you make is that government use of capital is = to private use of capital. This isn't true at all. Its not even a case of where government is just less return on investment than private. Government is a negative return on investment. Advocates of government spending refer to whats called the mulitiplier effect. The notion that if they spend money the receiver will take it and spend it themselves. But this happens everywhere money is spent. The problem with government is that its velocity of money is less than the private sector so the multiplier effect isn't as good as private sector consumption so it has a negative drain. But the multiplier effect in private investment is huge because all of the money is going towards capital improvement not just cost minus expenses(in normal consumption) or profit.

Your next statement somewhat acknowledges what I've posted above. When you allow more money to be allocated privately which is what private accounts does, more wealth is created because its not a zero sum game. If it was the stock market today would be the same value as it was in 1900. When have you ever seen the government give a return on anything? They don't. At best they take out and put back in the same amount of wealth. But traditionally they always take out vastly more value than they put back into the economy. SS is no different. Keep in mind that their ability to get higher tax revenues is based on receiving money from the private sector they don't produce any wealth internally.
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Old 05-18-2009, 03:44 AM   #80
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The question of whether stock options are a zero sum game is a good one. I actually don't agree that they are a zero sum game. I think the problem is inherent in how they are used. For example day trading is often called zero sum and it is not because the average return someone should receive a day is .04%(if you assume 10% a year). What is zero sum is the difference from the average. In order for someone to receive .08% that day others have to balance it out for it to average .04%. Because such large sums are traded daily by day traders the .04 becomes irrelevant and its said to be a zero sum game. The problem with options is similar the time horizon is to short and the swings to wide for the standard .04 a day, 10 a year to really be an issue. But you can easily demonstrate that it isn't a zero sum game by taking out long term options. Over 1 year and its called a LEAP. Call LEAPs consistently return postive returns about as much as the regular stock market does. It has to, you pay a premium that is less than the stock price and you hold it long term. How can that be a zero sum game? This is also why life companies can return consistently good returns on their indexed policies when the assets supporting them are long term call options.
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