[EMAIL PROTECTED] wrote:
>Doug, perhaps you can explain to me Greenspan's thought
>process. If Social Security is privatized in the way he
>was talking about this means a great deal of more money
>flowing in to the stock market and, I believe he suggests,
>an increase in the rate of saving. But if, as you argue,
>the stock market is not about financing new issues but
>merely bidding up the price of existing paper, this means
>that the 'saving' would not generate any real output when
>the time comes to pay pensions. Moreover, if as post Keynesian
>thought has it, investment creates savings (rather than the
>new classical savings creates investment) would not the
>attempt to increase savings reduce investment and further
>reduce the ability of the economy to produce pensions out
>of future realized output?
Well, I can't speak for the mighty Greenspan, but I saw a bit more
skepticism about privatization in his remarks than others did. Fed staff
economists have been publishing work showing that 401(k)'s and other
individual retirement provision haven't resulted in any new saving, but
only a reallocation. (See the abstract below, for example.) Cato hacks may
be able to finesse these issues, but the Fed is a bit more serious.
I see Greenspan's skepticism in passages like these:
>Finally, if individuals did invest a portion of their accounts in equities
>and other private securities, thereby receiving higher rates of return and
>enhancing their social security retirement income, what would be the effect
>on non-social security investments? As I have argued elsewhere, unless
>national saving increases, shifting social security trust funds to private
>securities, while likely increasing income in the social security system,
>will, to a first approximation, reduce non social-security retirement income
>to an offsetting degree. Without an increase in the savings flow, private
>pension and insurance funds, among other holders of private securities,
>presumably would be induced to sell higher-yielding stocks and private bonds
>to the social security retirement funds in exchange for lower-yielding U.S.
>Treasuries. This could translate into higher premiums for life insurance,
>and lower returns on other defined-contribution retirement plans. This would
>not be an improvement to our overall retirement system.
>
>Furthermore, the potential consequences of moving social security to a
>system that features private retirement accounts need to be considered
>carefully. Any move toward privatization will confront the problem of how to
>finance previously promised benefits. That would presumably involve making
>the implicit accrued unfunded liability of the current social security
>system to beneficiaries explicit. For example, participants at the time of
>privatization could each receive a non-marketable certificate that confirmed
>irrevocably the obligations of the U.S. Government to pay a real annuity at
>retirement, indexed to changes in the cost of living. The amount of that
>annuity would reflect the benefits accrued through the date of privatization.
>
>Under our current system, social security beneficiaries technically do not
>have an irrevocable claim to current levels of promised future benefits
>because legislative actions can lower future benefits. In contrast, the
>explicit liability of federal government debt to the public is essentially
>irrevocable. A critical consideration for the privatization of social
>security is how financial markets are factoring in the implicit unfunded
>liability of the current system in setting long-term interest rates.
In other words, we can always screw workers, but not bondholders!
But you're right that more money flowing into stocks wouldn't produce the
investment necessary to pay off privatized pension obligations over time.
Since the privatizers accept the 1.4% GDP growth projection for the next 75
years, and assume 7-10% real annual stock returns, they are implictly
endorsing Ponzi valuations.
Whether S precedes I or vice versa seems more a theological dispute than
anything resolvable using social science techniques; I'd rather see them as
two sides of the same process of foregoing consumption. No matter how you
slice it, though, U.S. savings and investment levels are among the lowest
in the OECD. And aside from quantitative issues, I think an ever-larger
share of U.S. investment has been devoted to high-return, quick-payback
projects. (Similarly, R&D has shifted away from basic research into product
development.) These characteristics of real I have helped fuel the bull
market. But you have to wonder about the long-term effects of this, don't
you?
Doug
----
> "Debt, Taxes, and the Effects of 401(k) Plans on Household
> Wealth Accumulation"
>
> BY: ERIC M. ENGEN
> Federal Reserve Board
> WILLIAM G. GALE
> The Brookings Institution
>
>
> SSRN ELECTRONIC DOCUMENT DELIVERY:
> http://papers.ssrn.com/paper.qry?abstract_id=40180
>
> Date: May 1997
>
> Contact: Eric Engen
> E-mail: MAILTO:[EMAIL PROTECTED]
> Postal: Board of Governors of the Federal Reserve
> System Federal Reserve Board, 20th and C
> Streets, NW, Mail Stop 83, Washington, DC
> 20551
> Phone: (202) 452-2980
> Fax: (202) 452-5296
> Co-Auth: MAILTO:[EMAIL PROTECTED]
> FEN Ref: JFA:C-WPS97-295
>
> This paper examines interactions between tax-preferred assets
> and tax-preferred debt, each of which has grown dramatically
> since 1980. For all households and for homeowners, we find
> that to the extent that eligibility for 401(k) plans raises
> households' financial assets, the increase is generally
> offset by reductions in housing equity and in particular by
> increases in mortgage debt. For renters, the results are
> somewhat mixed. Because homeowners hold the vast portion of
> 401(k) balances, our results indicate that, at best, only a
> small proportion of 401(k) contributions have represented net
> increments to saving. The results also suggest that the
> response to 401(k)s can vary across households and highlight
> an important interaction between household debt and saving.
>
> JEL Classification: G11, E21
