Here's the picture. The raw material is the Congressional Budget Office. The thousand words it is worth below. But, basically, the CBO admits that "Plan 2", the Bush Plan, is a leveraged buy out of Social Security.
The CBO Analysis:
The source of the above graph is the Congressional Budget Office's own analysis of "Plan 2". The two projections - current law in black and proposed Plan 2 in red - are overlayed at the revenue line, because this allows us to compare the net impact on the budget out to trust fund exhaustion.
As you can see - even using the CBO's own numbers, the plan is to borrow 1%-2% of GDP for a long time, and hope that saves us money later. And then, mysteriously, savings will appear. These projections are extremely generous, one might even say "stacked" in favor of Plan 2.
First because the expenditures, do not include the borrowing on that big red blob. Throw that in and it looks even worse.
Second because the savings do not include the increased costs of poverty programs. In effect, if the government is going to have people retire through the stock market, it is going to have to insure the stock market. To guard against the day that there is a huge stock market crash - like the one we just had a couple of years ago - the Government will, in effect, have to reinsure retirees, either directly or indirectly. This reinsurance cost, and the liability risk that it brings is also not included.
That's why the "negative wedge" exists - because the costs for the borrowing and the reinsuring are not included. Throw these in, and, even using CBO numbers, most of that wedge of savings disappears completely.
Effect if Retirement Accounts | Cutting benefits
|
0.00 | 0.00
|
-0.67 | 0.38
|
-0.22 | 1.30
|
0.11 | 2.33
|
0.17 | 3.21
|
0.22 | 3.99
|
Source: CBO, expressed as a percentage of GDP.
Note that the "private accounts" never breaks even over the course of the CBO's own simulation.
One can't argue that the current law creates lower benefits - because plan 2 says "cut benefits now". One can't argue for more choice, because Plan 2
assumes universal participation. Possibly because benefits are to be cut in two ways.
One can't argue a higher rate of return for retirees either, because benefits are also to be cut by "Treasury minus 1%". Interest rates are at generational lows now and that would be 3%, and by "price indexing" rather than "wage indexing" the benefits. So most of the wedge isn't that "privatization" is cheaper, it is that we are planning on being cheaper.
More over there are a host of missing questions in the CBO projections. For example - all that borrowing is not assumed to do anything to GDP. In otherwords, the Federal government is assumed to be able to just "pick it up another notch" and borrow another 1% of GDP for decades, without any effect on GDP growth. If that is the case, why don't we just pass a bunch of public works programs and hope that they generate enough economic activity to increase GDP in the future? Or any number of other schemes which will bet on borrowing now and hoping it will all work out later.
Another missing question - who are we going to borrow this money from, we are already receiving virtually every dollar of savings on the planet. Who, precisely, has the kind of loose cash that they want to lend for that big red zone. And how are they supposed to get their money back. In effect, they are lending money to someone who admits that that money is going to be lent, uninsured, to what the industry calls "dumb money".
Would you, if you had a loose trillion, lend money to someone who is running a chronic budget deficit, based on the scheme that 50 years from now, he will actually show some returns based on not buying any insurance on your investment?
Whose ponzing who?
Conclusion
According to the CBO, Plan 2's solution is to have the crisis now, borrow a huge amount of money, and hope that it saves us money later on, based on everyone being willing to accept much lower than market risk premium on their basic retirement money. Even excluding this borrowing, they don't show a net positive until around 2055. And most of that is based on cutting benefits over the next 50 years.
The savings wedge assumes that we are willing to let old people starve on the street if their investments went sour, and that some future government won't see the difference between FICA taxes and outlays as a "surplus", and notwithstanding the huge national debt that has been racked up, smile and say "don't you deserve your money back? Let's reduce revenues, and keep borrowing the money."
Given the last 24 years of US policy, isn't this the outcome you would bet on, after all, it is what their grandparents back in '05 would have done...
So let's get this straight, the people who can't find cheap oil in Iraq are telling us that "look, over the horizon, profits!".
[Update: Krugman reads the same numbers and comes to the same conclusion. Always nice when you agree with the prof...