Sunday, January 09, 2005

Op-Ed Needed

This is one Dean Baker needs write. As he's pointed out several times, the assumptions about economic growth (pessimistic) made by the Social Security Trustees are literally incompatible with assumptions future equity returns (optimistic). They've tried to make the point by giving people a little test -- having them fill in the combinations of capital gains/dividend earnings which give rise to the 6.5-7% returns assumed by the destroyers of Social Security.

However, the point of this test is lost on most people, and they need to turn it around. The important point is that if the stock market grows at 6.5-7%, then the economy must grow significantly faster than the trustees predicting. As DeLong says:

That means that the profits of currently existing and traded companies (not aggregate profits!) have to grow at 3.5%-4% per year... That means that the economy as a whole has to grow at 4.5%-5% per year forever... That's much higher than the Social Security actuaries' long-run growth assumption, which heads for productivity growth of about 1% per year and very low population growth by 2050.

I want a nice little op-ed pointing out how long the Fund will remain solvent if the economy grows at 4.5-5% forever, a requirement for stock returns of 7%.