Friday, February 04, 2005

Krugman on Social Security

Well, it's a bit of a wonky read (for the Times, anyway), but it's still important. Well, unless you like being lied to about the real potential for economic growth.
Schemes for Social Security privatization, like the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.


The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years.

In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.


In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.

EDIT: You also should read what the Left Coaster has to say about our private accounts...apparently the Washington Post is reporting that it's not that private after all, and that the money you make off of your investment will have the cost of the government's loan subtracted from it: So if you invest in a company which makes 4 percent annually, and the government gets a "loan" to make the investment (estimated at 3 percent), you really are only making 1 percent on it. I've read this from a couple different sources...hopefully someone will correct me if I'm wrong.

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