Let's look at what the President said in his news conference.
We're saying, you ought to have the right to set up a personal saving account so you can earn a better rate of return on your own money than the government can.
And it's that difference between the rate of return, between what the government gets on your money and what a conservative mix of bonds and stocks can get on your money that will make an enormous difference, and a person being able to build his or her own nest egg that the government cannot spend.
Now, it's very important for our fellow citizens to understand there is not a bank account here in Washington, D.C., where we take your payroll taxes and hold it for you and then give it back to you when you retire. Our system here is called pay-as-you-go. You pay into the system through your payroll taxes, and the government spends it. It spends the money on the current retirees, and with the money left over, it funds other government programs. And all that's left behind is file cabinets full of IOUs. (emphasis mine)
What's wrong with the italicized part? If you said that what the government "gets" on your money is irrelevant, you're a winner. Why did he say it this way? No clue. Rhetorical flourish maybe. Maybe he thinks it sounds good to put the idea in people's minds that individuals can do better than the government. Sounds nice, but it's both irrelevant and technically wrong.
Hence PGL at Angry Bear writes:
So if I own a Treasury bond, that is a real asset but it is not a real asset when a Trust Fund owns a Treasury bond. And suppose I recently purchased a bond paying a 4.8% nominal return. Bush is saying this is somehow a better return than the Trust Fund gets – even though its bond also pays a nominal return equal to 4.8%.
Good catch, my friend. That is what Bush appears to be saying. And you're also correct to point out that it can't possibly be right.
But it's also irrelevant. Why? You could set the nominal interest on those non-traded bonds to be anything you want. It has no impact on the benefits that retired people will receive (a point I made here). The interest on the bonds does not figure into the benefit formula for an individual. Higher interest on the bonds would just mean that the general fund has to pony up more cash when the bonds come due--restoring "solvency" at the stroke of a pen by making it explicitly a general fund problem. It's irrelevant to the discussion of private accounts!
To the individual, it matters not "what the government gets" but "what the government gives" (the benefit formula).
So, PGL calls out Don Luskin for saying
Younger workers should have the option of putting a portion of their payroll taxes into a voluntary personal account which will allow them to build a nest egg that belongs to them. This money will give workers an opportunity to receive a higher rate of return than the current Social Security System can provide. (emphasis mine)
But to be fair, this is really just a paraphrase of the Moynihan-Parson's Commission (2001, p.38).
The river of lousy rhetoric runs deep indeed. Let's get it right. The pro-privatization side is doing a terrible job of explaining itself and it plays right into the hands of the opposition. It's a shame, because this just bogs down the real debate.
And what, you ask, do I think the real debate is (or should be)?
I'll have some thoughts on that later. It's probably not what you think I'm going to say.
A couple of points. While it is true that the interagency interest rates can be arbitrarily set to be anything, the current system has the Trust Fund being credited with an interest rate that is set to approximate the market rate. The other point is that the only reason why any particular cohort might be a lower return than market is that that cohort was asked to repay part of the shortfall from paying the benefits for Ida May et al. And since we can't get Ida May to pay into the system from her grave, SOMEONE has to fund the shortfall created in the past. When the Forbes privatization crowd finally concedes this point, I may singular handedly reduce the shortfall by dying early from sheer shock.
Wait a minute. Ms. Fuller et al. received a windfall. That doesn't necessarily mean that future generations will see a shortfall.
In the simplest textbook version of pay-as-you-go, all generations are better off as long as n>r (population growth is greater than market interest).
Our system is more complicated, but as a basic principle, the fact that one generation (Ms. Fuller's) benefits without paying in does not mean that subsequent generations are condemned to an eternity of below market returns.
Gotta go for now. More later hopefully.
Bill: Robert Barro might disagree but then Brad DeLong recently wrote a paper saying what you just did.
future generations are not condemned to an eternity of below markets returns if the populationngrows, as you say, but it is surely true that the return they get is lower than it would have been if the first generation had not got a windfall.
rjw,
Of course. I was in a hurry when I wrote that and thought it goes without saying. I was objecting specifically to the suggestion that future generations must get less than market returns simply because previous generations got above market returns.
If you were born in about 1900, your rate of return was around 12% (real) according to Gokhale and Lansing (1996 FRB Cleveland Econ. Commentary).
Of course the next generation will get less than 12%, but it doesn't have to fall below market returns to make up for Ms. Fuller's generation. It may fall below market returns for other reasons, however.
Things that could push down the equilibrium return to pay-as-you-go Social Security over time are...
1. decline in the worker/retiree ratio (population growth in the simplest texbook model)
2. decline in productivity growth
3. structural changes to the system demanding higher taxes from workers (as in 1983)
4. structural changes to the system demanding benefit cuts for retirees (as is being contemplated)
5. increase in retirement age (actually a subcategory of the #4 above)
These changes that have affected the system a lot since the 1970s have nothing at all to do with Ms. Fuller getting a windfall. That was my point. (But I didn't have time to write all this yesterday.)
Thanks for reminding me to clear the air on that.
And thanks for your consistently good comments!