Social Security - Savings and Retirement III

A last few notes and a proposal on resolving the crisis:

A plan for private retirement accounts that increases the total current-year U.S. Government deficit by an amount equivalent to the accounts does not increase the national savings rate. The later adjustment to the Administration's plan - combining the accounts with a guarantee of unreduced benefits for lower income recipients - actually decreases total savings over debt.

Pushing money into capital markets without regard for additional capital requirements tends to reduce the real return on capital invested in these same instruments, whether stocks or bonds. Bonds yields are inverse to demand. Funds flowing into stocks may drive the prices up by demand alone, but reduce the genuine price/earnings ratio. It is the productive power of capital that makes the investment unique - creating "savings" by driving up prices as a strategy actually works more clearly with fixed-sum items such as land or antiques or tulips with unique manifestations of the mosaic virus, and secondarily with commodities such as gold which reach new equilibrium prices by tapping more expensive sources of the material. When a company can simply dilute its stock, or effectively dilute it through mergers and acquisitions that historically subtract value, then the investment can lose value, and this is one strategy available to managers seeking their own interests when returns on capital fall. Note also that if the value of an asset is measured solely by demand, and the asset is meant to be sold to finance retirement, demographics still dictate a retriement problem - if the baby boomers need to pull money out as they retire, demand for stocks is reduced and therefore demand-driven price appreciation.

Clear paranoid note on labor and capital: standard rhetoric assumes labor is the little guy and capital is the big guy, and the pattern of stock ownership in the US bears this out. However, if the pattern shift and a much higher amount of stock is held by the majority of the people (probably through institutional means, especially "private savings accounts") look to the well- organized wealthy minority to find other ways of maintain their economic dominance - through executive compesation or other measures. One of the interesting things about bankrupt companies is that the capitalists are wiped out completely (stock owners) or receive small or negative returns (bond holders of varying precedence), while the "executive "laborers" may make out very well indeed, through golden parachutes and transition incentive plans.

Proposal.

• The first step in resolving the social security problem is to actually build on a principle that's makes actuarial sense. Here's one: in the first year that social security payouts would exceed social security payouts under the current, the total amount that is paid out is reduced until its in balance.
• My preference is that this exclude the revenue from the bonds the social security trust has purchased with previous surpluses, since doing so would make the transition more gradual by not delaying it. The surplus is treated as a national asset and it is only slowly eroded by inflation. This plank isn't essential and is unlikely since it actually involves discipline in the present in favor of the future, not a popular strategy.
• Okay, now the fun part: Congress can now deal with the shortfall however it feels best, with any formula - it can raise payroll taxes to increase the money available for payouts; it can cut benefits or the rate of benfit increases evenly; it can favor lower income recipients or longtime recipients; it can delay retirement age; it can tax or means-test benefits. The only thing it can't do it cook the books and spend money that it doesn't have the guts to raise.

As far as private accounts is concerned, there is one hard way to increase the national savings rate, if that's actually a good idea: make retirement accounts on a tax-deferred or Roth basis mandatory, by payroll deduction. You want people to save 5% of their income - there ya go. People who aren't savings would allasudden have less money to spend - but, frankly my dears, that's the only thing saving is. There are no free lunches.

Social Security - Savings and Retirement II

Ah, how sad - I spend so much time away from this post that the private accounts issue seems to have vanished for now. One does not wage an unpopular campaign of Social Security reform when one's approval ratings dip below 40%, especially with key Congressional allies having difficulties of their own.

Hmm, now what? I wasn't opposed to private accounts, especially since the most public case against them comprised arm-waving alarmism and grandstanding and there is an actuarial problem with Social Security as currently configured. I just wanted to point out the flaws in some of the unexamined economic assumptions.

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Okay, less ponderously then, a few more points, mainly drawn from various issues of The Economist:

• Ben Bernanke, while a Federal Reserve governor, talked about a global savings glut. postulating too much savings relative to what's needed for productive investment for the current level of consumption.
• Capital flows have tended to be from Japan, the oil producing nations, China and other developing countries toward America, financing the government deficit and American consumption.
• The high savings rate - liquid, not re-invested in capital - of American corporations indicates that they have more than adequate internally-generated capital; continued low long term interest rates as a result of the savings or liquidity glut make access to additional capital relatively inexpensive.
• Companies that have a high rate of capital spending average a lower rate of return on that spending. Law of Diminishing Returns.
• Keynes described how a higher investment rate economy-wide could actually lead to lower production, by suppressing demand. If a company cannot sell its products at a price that produces a good return on capital invested, it doesn't -- or shouldn't -- invest the capital.

So, if private accounts or other such proposals increase the rate of American savings and decrease current consumption, what might happen?