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Thursday, March 31, 2005

"Like pre-paying a mortgage" when you don't owe the bank anything anymore.

I think I finally understand what is wrong with the well know pro-personal accounts talking point quoted above. I learned this from Brad DeLong's blog, but I had to read hundreds of words and then think to figure out what he was saying (heaven forfend). Brad is going to be less busy day after tomorrow and might want explain these things slowly and clearly for us non experts.

"given divorces, remarriages, the progressivity of the benefit formula, and so forth, in a large number of cases the government does not have a large enough Social Security liability to be able to reduce it enough to balance the cost of the money diverted to the private account. A ballpark estimate is that the Bush private accounts proposal has a net fiscal cost to the U.S. government of some $1.1 trillion in present value--half a percentage point or so of taxable payroll."

Those two sentences are the kernel of the argument and they are long. I think it means "in many cases it will be impossible to claw back money diverted to personal accounts plus 3% real because that would imply a negative guaranteed benefit."
Then to elaborate and attempt to spaqn a talking point
"The restriction that guaranteed benefits be positive implies that, in many cases, for the social security administration, personal accounts will be like pre paying a mortgage when you don't have a mortgage." or better

"For the social security administration, diverting revenue to personal accounts for rich contributors would be like pre-paying a mortgage when you don't have a mortgage on your house."

The implicit hypothesis of the conditional "would" is not just "If Bush's secret plan is enacted" it is also "If Bush's secret plan is enacted and enough time has passed for the aforementioned rich to run their guaranteed benefit down to zero."

This is a technical detail. The present value of such losses to the Social Security Administration might be overestimated and could be as low as a mere Trillion dollars.

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