Captain Obvious and His Trusty Sidekick

Dean Baker and David Rosnick over at the Center for Economic and Policy Research have a new brief that purports to look at what effect the "progressive indexing" proposal that President Bush has been endorsing of late would have on rates of return for Social Security.

Their conclusion?

The rates of return went down.

The proper, measured reaction of anyone who isn't completely comatose?

Duh.

What possible alternative result were they expecting of a proposal for significant cuts in benefits adjustments and no change in the tax base? This required an analysis? Someone's got an awful lot of free time on his hands.

Of course, the comparison they're making is to the projected rate of return that would be realized if both current benefits and current contributions remained constant. But, as I hope most have come to grasp at this point, the current benefits and contributions can't remain constant.  There's that whole looming insolvency issue and all...you know, as I recall it, the only reason anyone's having this discussion in the first place.

There's only a limited number of options for sorting out that whole insolvency thing -- tax hikes, raising the retirement age, etc. -- and far as I can tell, they ALL would contribute to a lower rate of return. So the proper comparison is not to things as they stand -- an arrangement which is untenable -- but to the lower returns that would be realized if, for instance, benefits remained constant, but the payroll tax went up the 6 or 7 percentage points needed to balance the system. And that includes the huge opportunity cost of the returns that would have been realized on those funds if they didn't have to be devoted to Social Security.

Speaking of Social Security and rates of return, I'm just curious: at what point did a memo get circulated among the left-wing public intellectuals instructing them not to recognize the existence of foreign markets? Witness Krugman, for instance:

To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.

But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible.

The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years.

In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.

I would note, first of all, that such sluggish long-term growth rates hardly present a rosy outlook for our ability to meet the obligations imposed by Social Security and the other public entitlements programs, with or without private accounts. An economy that can't manage 3% growth in its equities market can't very well shoulder a tax burden that grows much faster than that.

But, that said, there's no particularly good reason why the investments of Social Security's private accounts have to be solely tied to the domestic growth rate, since there's no particularly good reason to limit oneself to domestic investments.  The Chinese and Indian economies are certainly expected to grow faster than 1.9% annually over the 75-year frame, and one would expect, at some point down the line, the African and Middle Eastern economies to join them.

CALPERS and the other big public pension funds have done a fine job of capturing the higher growth rates of the emerging markets in the past, so why couldn't Social Security be counted on to do the same in the future?