Monday, January 31, 2005

Krugman

Nicely addresses the crucial point:

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?


The Social Security Trustees, to their immense shame, have scored various models using these contradictory assumptions -- that stocks will grow and the economy won't.

I'm still waiting for someone to hammer it home with the reverse calculation that Krugman discusses earlier in the column -- assuming stock returns are 6.5% - 7%, what long run rate of growth does that imply, and what impact would that have on the solvency of the trust fund. The "I'm pretty sure it's true" answer is that it'll make it more than solvent for all eternity, but I'd like to see someone lay it out.