Pardon if others have already seen this, but I am shocked that their argument partly includes the position that "However, the increase in the government deficit, due to the loss of Social Security tax revenues during a transition period, can lead to serious financial problems." They argue that "if Argentina had not privatized it Social Security system in 1994, and done everything else exactly the same, it would have run a budget surplus in 2001." Are we to assume it is understood that budget deficits are always harmful and surpluses helpful? Or is this a case of expected political expediency overriding economic logic? Mat
------------- Defined Contributions from Workers, Guaranteed Benefits for Bankers: The World Bank's Approach to Social Security Reform By Dean Baker and Debayani Kar July 16, 2002 EXECUTIVE SUMMARY In the last decade the World Bank has actively promoted the partial or complete replacement of public Social Security systems with systems of individual accounts. While proponents of such accounts had originally hoped that they would boost growth by increasing national saving, the evidence to date has convinced even most advocates of individual accounts that the net effect on national saving will be minimal. However, the increase in the government deficit, due to the loss of Social Security tax revenues during a transition period, can lead to serious financial problems. In the case of Argentina, the current budget crisis can be attributed largely to the decision to privatize its Social Security system. The lost tax revenue, plus the interest resulting from the additional incurred expenditure, exceeded its central government budget deficit in 2001. In other words, if Argentina had not privatized it Social Security system in 1994, and done everything else exactly the same, it would have run a budget surplus in 2001. This paper compares the administrative costs associated with individual accounts, measured as a share of contributions to the system, with the costs of operating an efficient public Social Security system like the one in the United States. Among the findings: 1) According to data from the World Bank, the administrative cost of running privatized systems of individual accounts is between ten and fifty times as much as the administrative cost of running the public Social Security system in the United States. These additional fees are direct transfers from workers' retirement income to the financial sector. 2) According to data from the World Bank, the cost of the running the public agency that supervises the operation of a system of individual accounts (the equivalent of a Securities and Exchange Commission for these accounts), is between 62 percent and 400 percent of the administrative cost of running the entire Social Security system in the United States. In most countries, the cost of running this oversight body is far greater than the cost of actually running the whole Social Security system in the United States. 3) The cost of converting funds accumulated in individual accounts into an annuity that provides a lifetime stream of earnings is between 11 and 22 times the cost of operating the Social Security system in the United States. These fees are direct transfers from workers' retirement income to the financial sector. 4) Proponents of individual accounts have failed to consider the opportunity cost to workers, in the form of the time needed to oversee their accounts. If the time required to manage these accounts is equal to half an hour per year, the opportunity costs would be between 55 percent and 280 percent of the administrative costs of the Social Security system in the United States.
