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February 7, 2005
We're all Ricardians now
From the section of the budget on the fiscal outlook, which discusses Social Security in broad sweeping terms:
The effect of creating personal accounts would be to protect some portion of worker payroll taxes from the reach of the Federal Treasury. The Federal Government might therefore have to increase its borrowing in the private capital markets by an amount equal to the annual flow of payroll taxes into the personal accounts. While the creation of personal accounts would increase Federal borrowing, they would also reduce the Federal Government’s future spending obligations by an equal amount. Both effects must be shown and understood together—both the size of near-term investments in personal accounts, under reasonable participation assumptions, and the corresponding amount by which reform would reduce future unfunded obligations. It is misleading to measure only the near-term impacts.
Under most circumstances in which the Federal Government borrows funds, it is because the Government is spending more on goods, services, and transfer payments than it is taking in. In the case of personal accounts, however, the reduction in national savings from the Federal Government’s increased borrowing exactly matches the increase in private saving that occurs through the personal accounts. There is no net reduction in national saving arising from this arrangement, nor is there any reduction in the flow of saving available to the private sector. For this reason, the creation of personal accounts is not expected to have any detrimental effect on financial markets or on the overall economy.
Comprehensive reform that includes personal accounts would permanently eliminate the unfunded obligations of the current system. Ultimately, that is the standard by which any legislation to strengthen the Social Security system must be held. To achieve this, the long-term growth in annual Social Security outlays cannot be greater than the long-term growth in program-generated receipts.
Projections regarding various proposals' fiscal effects and their impact on beneficiaries will be based on analyses provided by the non-partisan actuaries and other technical experts at the Social Security Administration.
Let me paraphrase what I have said repeatedly on this blog. In principle, I think this is pretty close to the mark. It will not be exact Ricardian Equivalence, but people will choose to hold some bonds. Stock prices will not get totally out of line with bond prices.
More to the point they are making, I think they also have the right idea about the transition cost. First of all, the transition cost simply brings forward the future obligations that under the current system we will not be able to pay.
So this (from the first paragraph quoted above) is, at least as a first approximation, correct:
While the creation of personal accounts would increase Federal borrowing, they would also reduce the Federal Government’s future spending obligations by an equal amount....It is misleading to measure only the near-term impacts.
Yes, I realize that this is a bit heroic. It's a first approximation. That is why I went on to qualify my stance a bit further.:
I'd like private accounts, but I'd like them done correctly. The more gradual the transition, the more the transition cost can be spread out. The sooner we start, the more gradual we can afford to be.
If anyone at the White House is reading this, you can have that line free of charge.
Posted by William Polley at February 7, 2005 12:01 PM
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