[PEN-L:28502] RE: Baker and Kar on SS

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:28486] Baker and Kar on SS

Mat writes:
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

-------------

In the case of Argentina, and other poor countries, government deficits should be avoided. They typically lead to external debt, which leads to IMF dictatorship, etc.

Also, it makes sense to me that a country would rather its government spend its budget on stuff that's really needed rather than on administering an inefficient pension plan. The way that budgetary analyists say this kind of thing is terms of the government budget constraint. In any event, Dean Baker regularly makes assertions based on dubious theories that are generally accepted by economists. Awhile back, in his _Economic Reporting Review_, he used the bogus aggregate production function (a Cobb-Douglas one at that) in order to make a point against some policy perspective he rejected. Still his ERR is useful (while to ERR is human).

JD

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.