Running Scared: Observations of a Former Republican
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"Losing my faith in humanity ... one neocon at a time."

Friday, February 04, 2005

you can kill a flock of sheep with witchcraft,........

posted by Ron Beasley at 2/04/2005 01:40:00 AM


.......provided you also feed them arsenic.
As we might anticipate, Paul Krugman does the best job of explaining Bush's plan to "save" Social Security. I will start with his final paragraph:
Do you believe that we should replace America's most successful government program with a system in which workers engage in speculation that no financial adviser would recommend? Do you believe that we should do this even though it will do nothing to improve the program's finances? If so, George Bush has a deal for you.
So, what is the plan? Krugman explains that "the plan" amounts to the government loaning you money at 3 percent. If your government selected "safe" portfolio does better than 3 percent you will be better off, if not you lose. It's like going to the horse races and letting someone you don't know chose which horses you should bet on. Here is how it works:
"In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent rate of return" - after inflation - "which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent rate of return."

Translation: If you put part of your payroll taxes into a personal account, your future benefits will be reduced by an amount equivalent to the amount you would have had to repay if you had borrowed the money at a real interest rate of 3 percent.
The only way to get ahead would be to invest in risky assets like stocks, and hope for higher yields. But if the investment went wrong and you earned less than 3 percent after inflation, your benefit cuts would leave you poorer than if you had never opened that private account.

So people are expected to take a loan from the government and use it to buy stocks, and if that turns out to have been a mistake - well, too bad.

So that great financial advisor George W. Bush is telling you to do exactly what investment advisors would tell you not to do.
Experts usually tell people to plan for their retirement by investing in a mix of stocks and bonds. They disapprove strongly of speculation on margin: borrowing to buy stocks. Yet Mr. Bush wants tens of millions of Americans to do exactly that.
OK, but it's going to "fix" Social Security you say. Well not exactly.
Here's the senior official again: "In a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of Social Security." The government would have to borrow huge sums up front to create the personal accounts - $4.5 trillion in the first two decades - but it would supposedly make up for all that borrowing with offsetting cuts in account holders' benefits many decades later.

Color me skeptical: will retirees with private accounts that performed badly really be forced to repay their loans in full? Even if they are, private accounts will at best have a "net neutral effect" - that is, they will do nothing to improve Social Security's finances. Mr. Bush says the system faces a crisis; what does he propose to do about it?
His "plan" will do nothing and in fact will only make it worse. That can only mean there are going to be some future benefit cuts he kind of left out of the speech. Remember WMD? Remember Saddam's ties to al Queda? That's where the title of the post comes in.
...his plan will also involve major benefit cuts over and above those associated with private accounts. And it's true that you can improve Social Security's finances with privatization, as long as you also slash benefits - just as you can kill a flock of sheep with witchcraft, provided you also feed them arsenic. (Thanks, M. Voltaire.)
I don't know about you but I wouldn't want George W. Bush as my investment advisor and I wouldn't take any of his friends to the horse races.

Index of Social Security Posts