GET INVOLVED IN POLITICS! here's how
PLEASE call your congressman and tell you to strengthen social security, that we should have control of our own social security. Tell them to PRIVATIZE SOCIAL SECURITY. if you dont know the condition please check this website or read below.
Why America Needs Social Security Reform.
please check http://www.socialsecurity.org
by Jagadeesh Gokhale
"Jagadeesh Gokhale is a senior fellow at the Cato Institute, Washington, D.C.
With the re-election of President Bush, everyone from Wall Street to Main Street is now wondering about the financial impact of a now more likely Social Security personal accounts reform. Allowing workers to deposit part of their payroll taxes into personal accounts would siphon off revenues currently used to pay retiree benefits -- payments that consequently would require larger federal borrowing. In addition, the government may issue marketable "recognition bonds" to personal account participants reflecting benefits accrued from their earlier payroll taxes. By how much will federal debt held by the public increase and how will financial markets be affected constitute today's $10 trillion questions.
The prospect of a massive increase in U.S. federal debt appears scary. Closer reflection, however, reveals that the concern about a negative impact are overblown. Suppose that half of total payroll tax revenues -- $300 billion in 2005 -- are redirected into private capital markets. The government would then have to borrow only an additional $212 billion to continue paying current retirees their benefits. This is because payroll taxes are projected exceed Social Security outlays in 2005 by $88 billion -- an amount that the government won't have to borrow to meet benefit commitments. Thus, more funds could be injected into private markets through personal accounts than withdrawn through government borrowing. This would remain true until payroll tax surpluses are projected to last -- through the year 2018.
Issuing marketable recognition bonds to personal account participants -- by between $4-$6 trillion depending on how they are calculated -- would also increase federal debt held by the public. However, this increase also won't absorb current saving because the bonds would be awarded, not sold, in acknowledgement of workers' accrued benefits from their past payroll taxes.
The reform-induced addition to outstanding government bonds would tend to depress their prices and increase their yields. The size of this effect will be minimized if the Federal Reserve continues to follow a monetary policy consistent with price stability. Furthermore, if the economy continues to recover, oil prices decline and stabilize, and capital inflows continue unabated, interest rates are unlikely to increase significantly faster than normal during economic recoveries. It is notable that despite an increase of almost $1 trillion in federal debt held by the public between 2001 and today, yields on long-term (20-year) Treasuries have not budged from their 2001 level of just over 5.0 percent.
Future Social Security benefit obligations are not currently shown on official U.S. federal budget reports -- and therein lies the value of such a reform. U.S. policymakers have recently shown a proclivity to amassing unfunded obligations under a shortsighted view of their size -- Medicare prescription drugs, for example. The conversion of unreported obligations into explicit recognition bonds will reveal that federal indebtedness is much larger than is apparent under current accounting conventions. Even if this does not lead to a reduction in projected non-Social Security spending, it may constrain political incentives to further escalate such spending. And any reductions, if they occur, would increase government saving -- ultimately improving the nation's capacity to pay off its obligations.
What about the prices and returns on private securities? Unlike the earlier assumption, participants are not likely to devote their entire personal accounts to purchasing government bonds. Those who are constrained from investing in private markets today and who, post-reform, evaluate market risk premiums to be larger than warranted, would select riskier private securities, pushing up their prices and reducing their yield spreads over government bonds. Again, because small investors tend to be risk averse, this effect is likely to be small.
One important caveat to remember is that the choice of market risk exposures through personal accounts would be affected by the protection offered against investment losses via Social Security benefit guarantees. Although personal accounts investments will likely be restricted to highly diversified stock and bond funds, these securities remain riskier than government bonds -- including at very long horizons as evidenced by their persistent return premiums. Despite personal account regulations, very generous guarantees could induce excessive risk taking in an effort to bolster returns.
The extent to which market risk premiums are reduced and private saving increased will depend primarily on the manner and amount by which other reform features reduce Social Security's future unfunded obligations. The larger the retrenchment achieved by announcing a cut the program's scheduled but unpayable benefits to today's younger workers and future generations, the greater the likely positive impact on private saving -- which would tend to lower interest rates. Several recent studies on Chile's post-reform experience -- that also involved recognition bonds -- suggest a significant increase in saving as a result of the reform.
A significant reduction in unfunded obligations in this manner will also reduce the risk premiums built into private equity returns: Such a reform will resolve early the uncertainty about future tax and benefit changes, thereby instilling greater confidence in the stability of a low-tax and growth oriented fiscal policy environment.
A properly designed Social Security reform that resolves future uncertainties early, provides reasonable regulations against excessive risk taking, and does not replace today's overcommitment of Social Security benefits with a similar overcommitment of retirement income guarantees under personal accounts could boost national saving, improve the operation of capital markets, and increase economic growth. Ill-conceived measures and delays, however, could have the opposite effects."
This article appeared in the Financial Times November 30, 2004.