Adam Fields (weblog)

This blog is largely deprecated, but is being preserved here for historical interest. Check out my index page at for more up to date info. My main trade is technology strategy, process/project management, and performance optimization consulting, with a focus on enterprise and open source CMS and related technologies. More information. I write periodic long pieces here, shorter stuff goes on twitter or


Mayur’s extended screed on Social Security Privitization

Filed under: — adam @ 2:25 pm

Mayur has written an extended piece against Social Security privitization. With permission, I include it here in its entirety:


This is in reference to the Social Security debate. I have little interest in resurrecting the overall debate, except to say that upon a detailed and considered analysis (one of the reasons I was reluctant to dive directly into the discussion), I must say that I find that Krugman has the academic high ground here. If this post is too long, please do NOT post it to aquick: Part of the problem with the Social Security debate is that it’s too easy to adopt the privatization line on oversimplified grounds, whereas once the privatization point has been made, the rebuttal tends to require a more nuanced and detailed examination of the underlying economic and budgetary issues.

To wit, some useful resources:

A key text from this:

On the $10 (or 12) trillion supposed shortfall: That supposed shortfall is generated by extrapolating “the programís unfunded obligations and actuarial balance over an infinite time horizon. Given the uncertainty of projections 75 years into the future, extending these projections into the infinite future can only increase the uncertainty, so that the results can have only limited value for policymakers. This is due largely to anomalies and incongruities that inevitably arise from extending any set of long-range actuarial assumptions to infinity. For example, extending to infinity the assumptions used for labor force participation rates and mortality improvement leads ultimately to a situation where the typical worker is expected to receive benefits for a period longer than he or she pays into the system. It is not surprising that, at the current payroll-tax rate, the OASDI program cannot sustain itself in this situation. However, it seems unreasonable to argue that workers would not extend their working years longer than currently projected, based on extended years of ability to work, and the need to save more beyond Social Security benefits for the lengthened period of retirement.”

Thus, the projections provide “little if any useful information about the program’s long-range finances and indeed are likely to mislead any [nonexpert] into believing that the program is in far worse financial condition than is actually indicated.”
From Krugman’s long-form argument about Social Security, found at :

But the privatizers wonít take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless, because itís invested in U.S. government bonds. They arenít really saying that government bonds are worthless; their point is that the whole notion of a separate budget for Social Security is a fiction. And if thatís true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

But there are two problems with their position.

The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits ó which is what denying the reality of the
trust fund amounts to ó then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while
cutting them on the wealthy, on false pretenses. More broadly, weíre breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social
Securityís future, declare that it was all a little joke on the public.

The bigger problem for those who want to see a crisis in Social Securityís future is this: if Social Security is just part of the federal budget, with no budget or trust
fund of its own, then, well, itís just part of the federal budget: there canít be a Social Security crisis. All you can have is a general budget crisis. Rising Social
Security benefit payments might be one reason for that crisis, but itís hard to make the case that it will be central. But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say thatís meaningless, but when Ė in 2018 or later Ė benefits start to exceed the payroll tax, why, thatís a crisis. Huh?

I donít know why this contradiction is so hard to understand… But let me try this one more time, by asking the following: What happens in 2018 or whenever, when benefits payments exceed payroll tax revenues?

The answer, very clearly, is nothing.

The Social Security system wonít be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. Thatís not going to happen. So legally, mechanically, 2018 has no meaning.

Now itís true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever
wars we get into. I canít find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018. What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?

Itís interesting to ask what would have happened if the General Fund actually had been run responsibly ó which is to say, if Social Security surpluses had been
kept in a ďlockboxĒ, and the General Fund had been balanced on average. In that case, the accumulating trust fund would have been a very real contribution to the government as a wholeís ability to pay future benefits. As long as Social Security surpluses were being invested in government bonds, they would have reduced the governmentís debt to the public, and hence its interest bill.

We would, itís true, eventually have reached a point at which there was no more debt to buy, that is, a point at which the governmentís debt to the public had been
more or less paid off. At that point, it would have been necessary to invest the growing trust fund in private-sector assets. This would have raised some management issues: to protect the investments from political influence, the trust fund would have had to be placed in a broad index. But the point is that the trust fund would have continued to make a real contribution to the governmentís ability to pay future benefits. And if we are now much less optimistic about the governmentís ability to honor future obligations than we were four years ago, when Alan Greenspan urged Congress to cut taxes to avoid excessive surpluses, itís not because Social
Securityís finances have deteriorated ó they have actually improved (the projected exhaustion date of the trust fund has moved back 5 years since that
testimony.) Itís because the General Fund has plunged into huge deficit, with Bushís tax cuts the biggest single cause.

Iím not a Pollyanna; I think that we may well be facing a fiscal crisis. But itís deeply misleading, and in fact an evasion of the real issues, to call it a Social Security crisis.
Also, the NYT’s Editors have finally gotten off their guff to make a definitive, plain-language statement on the issue:
Finally, even the World Bank, a notoriously enthusiastic proponent of privatization, admitted that the Social Security reforms in Latin America have failed in the goal of providing real coverage to poorer people. This is particularly telling because the putative purpose of reforming SocSec in the US is NOT to accomplish the goal that was successfully achieved in Latin America, namely that of reducing actual inequitability and unsustainability in government pension programs. Unlike Chile’s program, for instance, SocSec in the US has been a successful and sustainable program for decades. Instead, the goal is to address a supposed benefits crisis, something that the Chilean system has actually failed to do. From the report itself:

* Investment accounts of retirees are much smaller than originally predictedóso low that 41 percent of those eligible to collect pensions continue to work.
* Voracious commissions and other administrative costs have swallowed up large shares of those accounts. See study by one of Chile’s prominent brokerages, CB Capitales; I can do a translation of the relevant parts if desired:

* In short, when commission charges are taken into consideration in Chile, the total average return on worker contributions between 1982 and 1999 was 5.1 percentónot 11 percent as calculated by the Chilean superintendency of pension funds. The Capitales report found that the average worker would have done better simply by placing their pension fund contributions in a passbook savings account.

* The transition costs of shifting to a privatized system in Chile averaged 6.1 percent of GDP in the 1980s, 4.8 percent in the 1990s, and are expected to average 4.3 percent from 1999 to 2037. Those costs are far higher than originally projected, in part because the government is obligated to provide subsidies for workers failing to accumulate enough money in their accounts to earn a minimum pension.

My friend Diego (at the SF Fed) recommends the following study by his colleague Stephen Kay at the Atlanta Fed:

In fact, the World Bank report lauded as the most prominent success story the achievement of Brazil in alleviating poverty by making adjustments to its existing defined benefit retirement program rather than pursuing privatization: “Countries such as Brazil that have well-developed capital markets may well choose to change the parameters of their public PAYG pension systems rather than switch to a mandatory funded scheme.”
**************************************************************************************************************************** In other words, privatization actually may be the LEAST desirable solution for the most economically-advanced states!

Comments are closed.

Powered by WordPress