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.