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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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From: CalculatedRisk	12/16/2004 3:06:08 PM
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New New Deal, Financial Times Published: December 16 2004 02:00 \| Last updated: December 16 2004 02:00 MY COMMENT: This is an excellent editorial that illuminates succinctly many of the arguments against Bush's SS proposal. President George W. Bush's second term may prove as controversial on the domestic front as his first term did internationally. His administration has set its sights on far-reaching reform of Social Security, the centrepiece of Roosevelt's New Deal. In the absence of a specific White House proposal it would be premature to offer any final judgment. But there are reasons to question the assumption that part-privatisation is the answer to America's public pensions challenge. The president's men like to argue that Social Security faces a funding crisis. This overstates the case. The scheme takes in more than it pays out, creating a notional trust fund that will not peak for more than a decade. Thereafter the accumulated surplus will diminish, but it will be 2042 before it runs out, and even then the present level of contributions will cover more than 70 per cent of obligations. For sure, there is a funding gap, bigger the further you look out. But it is a gap the US can easily afford to bridge. A2percentage point rise in contributions would cover the scheme's cost for the next 75 years. There are proposals that would combine higher contributions with modest benefit cuts to achieve stability into the 22nd century. In any case, what matters is not the solvency of an individual public programme but the overall finances of the government. The argument over the trust fund is a sideshow (it is all government spending, and government borrowing, in the end). It is impossible to argue that the US cannot afford to fund the Social Security gap but can afford permanent tax cuts and last year's Medicare benefit - both of which cost more in present value terms. Private accounts could be a politically savvy way of getting Americans to contribute more to the fund. There would be economic benefits too, if this were not viewed as extra marginal taxation. But the administration is not asking for any extra money: it wants to carve out existing contributions. To pay for the transition it proposes to raise trillions of dollars in extra debt, such that at its peak in 2036 US national debt would be 24 per cent higher as a proportion of gross domestic product than it would otherwise have been. This is deeply irresponsible. Nor is there any magic in higher returns on private funds invested in the market. Part of the higher return comes from not paying for current retirees and this is offset by the extra government borrowing. The rest comes from taking on more risk. The risk-free rate is still the government bond yield. If higher returns was the answer, the government could solve the problem at a stroke by simply issuing a huge amount of debt and investing the money in the market. None of this rules out private accounts as part of a broader overhaul of Social Security. But it does mean they cannot be the answer in themselves. Prudent reform would recognise that there must be new resources as well as somewhat reduced benefits.

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