Fellow
Shortrunners,
The baby boomer generation has provided some of the most interesting economic issues in recent history. One of the most intriguing comes from the fact that the relatively oversized generation will begin to retire in about a decade. This means they will begin to draw support from the nation's Social Security System. The future of this system and of other federal programs has recently found its way into headlines and political debates. I'm not going to suggest that I can give a complete overview of something that goes beyond economics, delving into issues of morality and politics, but hopefully we can use economics to understand where we stand and how we got there.
Recently, many Republicans have suggested that the nation needs to privatize Social Security. At first glance, it's pretty difficult to argue with them, the returns to money placed into the system on an individual basis amount to annual rates of about 2%. Compared with the returns that have been realized on the stock market during the past decade, 2% is rather dismal to put it nicely. On the flip side, opponents have argued that government needs to force some to save who wouldn't ordinarily save and provide what amounts to a virtually risk free investment (provided it doesn't run out of money). Furthermore, Social Security has what is called a COLA (cost of living adjustment) meaning it is adjusted for inflation, but I'll save more talk on that issue for a future issue.
Economists know better than to look at these figures. Social Security is a much more complicated issue and volatility and returns are better left to brokers. The Social Security is run as a pay as you go system. This means that money collected from the current workforce goes to pay current benefits. Contrary to popular belief there isn't some individual account for each worker, and the benefits that a person receives are only vaguely linked to the amount of money they put into the system.
The System was created by Franklin Roosevelt in a bill passed in 1935, just at the turn of the Great Depression. Workers began to receive lump sum payments averaging some $53. Monthly payments were instituted until 1942. The first generation of retirees was able to benefit from a retirement plan without having to ever put any money into the system. But as most economists like to joke, there's no free lunch. In order to provide this generation benefits, the system was forced to (in effect) borrow from future generations. The first retirees who took benefits left the system with an implicit debt, that is, the social security system has had to essentially pay low returns because it has been carrying the burden of paying benefits to a generation that never paid into the system. The result has been the low returns. Economists such as Paul Krugman have estimated the implicit debt in today's figures to be around $10 trillion.
What else does the debt mean? It means that we simply can't stop adding money to the system without some of those who added to the system not receiving any benefits. Social Security can't be easily privatized because people are still paying for the system's implicit debt and the system can't be halted because the current generation would receive no benefits even though the added to the pot.
In 1983 a group of politicians and economists (known as the Greenspan Commission; for it included our current Fed Chairman Alan Greenspan), met to discuss the future of Social Security. Demographics told them then that there would in fact be trouble. They suggested a rise in the payroll tax - the FICA portion of your paycheck (7.5% from you which is matched 7.5% by your employer). The implementation of this increase has led the Social Security System to run a surplus, such that it will be able to run in the black, that is without a dwindling trust fund, until 2025. By then, the accumulated surplus is projected to allow payments to continue until a later date probably 13 or 14 years later, at which time the fund would run out of money.
That's a pretty long ways off, and these numbers are likely to change. Regardless, if trends stay the same, something will need to be done. That is, further increases in the retirement age will have to take place, taxes will increase, or benefits will decrease. None of this is to say that privatization is impossible. It just seems unfeasible unless Americans are willing to partition a larger section of their pay in taxes (which I don't believe is the goal of the Republican party at the moment) to provide for separate individual retirement plans. It may be your money, but the government has also left you with a large burden in implicit debt in the Social Security System and its your debt too.
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
There wasn't a great deal of releases this week but those few that were available were significant.
Consumer Credit: $6.5 Billion
- The $6.5 billion rise in consumer credit during May represents an annualized credit growth rate of nearly 5%. Credit growth at this level was lower than expected. It mainly represents a slowdown in the growth of revolving debt (such as credit card debt). Overall, this is a good sign for the economy in that the double digit growth rates of credit that the economy had been experiencing were causing worries for several reasons. First, the debt was concentrated in revolving debt, that is, instead of using more cost effective long term solutions (mortgages) to provide for current consumption, borrowers have turned to credit cards. Second, there has been a slight up tick in defaults, those failing to repay their loans, a good sign that borrowing activity in the US may have become overly zealous.
- Wholesale trade sales fell 0.1% in May while inventories climbed slightly. The overall inventory to sales ratio rose to 1.32. The release offers us only slight pessimism. Inventory growth appeared to have slowed but in recent months has begun to rise again as sales have slowed.
- In one of its largest weekly jumps in nearly a decade, Jobless claims spiked to 445,000 rising some 46,000 over last weeks estimate. A good deal of the rise comes from continuing weakness in the tech sector and in California's economy as the power crisis remains unsolved. As for the the labor market, the weakness should give added fuel to an argument for lowering interest rates, and as such this release might have had a hand in the stock market rise which took place this week.
- Both import and export prices fell last month as the world economy slowed. Weakness is evident in the majority of the worlds markets, putting downward pressure on the prices of export goods. The overall terms of trade for the United States improved slightly as import price depreciation exceeded that of export prices.
- Following disinflation in import prices, the producer price index slipped dramatically, falling 0.4% in June amidst falling energy prices. Lack of inflationary pressure means that the Federal Reserve will have a freer hand in making monetary policy. At the same time releases such as this may help to bolster the case for another move of 50 basis points where as analysts are currently only suggesting another cut of 25.
- Surrounded by a torrent of slumping economic indicators, retail sales climbed 0.2% in June as electronics sales picked up. Growth in retail sales will help to prevent excessive inventory growth and may indicate that there is still confidence in an economy which has clearly slowed.
- The ECRI Weekly Leading Index fell to 119.6 last week and is now suggesting future slowdowns in the aggregate economy. The majority of the components of the index slipped, contributing to the downward move in the index. Among the most notable, mortgage applications fell strongly.
Classroom
Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section. Comment and suggestions as to the best method for this kind of a section would be extremely helpful.
Articles / Book Reviews
Newest Articles:
Balance
East and West
- Contributed by Kautilya AKD
Bush's
Tax Plan Just Doesn't Cut It
- by Alex Rothenberg
Newest Book Reviews:
Fuzzy
Math by Paul Krugman
- reviewed by Daniel Hicks
Growth
Theory: An Exposition
by Robert Solow
- reviewed by Daniel Hicks
Site News
Check out the new additions to the classroom and the studies sections.
**Thanks for everyone who has filled out a book review for theshortrun. Once things settle down a little here, I'll get to work posting some of these on the website. Again, I appreciate your support and effort**
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Issue #59
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