Grasping Reality on TypePad, by Brad DeLong

The feel-good thing to read this week is my 2005 Social Security Reform statement:

• Statement on Social Security Reform http://delong.typepad.com/sdj/2005/05/statement_on_so.html 2005-05-12

In my view, a Social Security reform plan needs to clear five hurdles before it is worth considering:

1. The private accounts it offers people must be a good deal for beneficiaries.
2. The plan must raise national savings.
3. The plan must preserve the valuable defined-benefit nature of the current program.
4. The plan should restore long-run solvency, and put in place mechanisms for automatic adjustment should the system fall further out of balance.
5. We must have confidence that the plan will be competently implemented.

You have already heard from Robert Shiller on how private accounts as proposed by the Bush administration are not a good deal for beneficiaries... higher returns are not worth the risk... the extra purchasing power gained in those states of the world when stocks do well does not match the losses beneficiaries see in states of the world when stocks do not do so well.... I don't have more than quibbles with Shiller....

I am actually, in at least one of my hearts-of-hearts, the heart-of-hears of an Eisenhower Republican, a believer in private accounts. I agree with Marty Feldstein that the... equity premium... over the past half-century tells us that the stock market has... not... mobiliz[ed] the risk-bearing capacity of the American economy... that... steps... to broaden and deepen stock ownership promise... significant improvements in the ability of America's business to raise capital.... I agree with ... Kent Smetters that it is a scandal and an outrage that the poorest half of Americans have no easy... low-fee way of investing in stocks.

But the Bush plan's private accounts are not private accounts that anybody should endorse. The 3%-plus-inflation clawback rate is just too high given likely future asset returns... READ MOAR