Boffoblog

Costs of Privatization TSP-Style

Recall two days ago in my pre-SOTU post when I warned about the uncounted administrative costs of using the TSP model for Social Security privatization?  The counting has begun, and it's at least as bad as I said.  Check out this brief summary from the Century Foundation (via Kevin Drum).

As Anrig notes at the end, given the regulatory and bureaucratic structure it implies as well as the substantial costs which fall disproportionately on small businesses, this hardly seems like the kind of thing that will please the Club for Growth and Cato folks.

Give This Photo A New Caption

This photo from AP is priceless; perhaps you saw it in the print edition of the New York Times today, too.

Smackdown From Wall Street

CNN/Money reports that a leading figure on Wall Street thinks Bush's Social Security privatization plan is wrong and stupid.  And his language is as clear and blunt as can be.  Here is the lede and the nut graf (for you journalism geeks):

Bill Gross, manager of the world's largest bond fund, is criticizing President Bush's plan to privatize part of Social Security.

Gross, managing director at Pimco, called the argument about the solvency of Social Security "silly" and said it was an example of the president not focusing on more important issues, such as the budget deficit.

Let's hear more from his monthly column on Pimco's website.  First, that the plan is driven by hubris rather than a real need to "reform" Social Security:

[T]his argument about insolvency and how much money is or will be in the Social Security Trust fund is really all so silly. It is an argument to promote an agenda that has little to do with seniors and more to do with Bush, his ownership society, and ultimately his domestic legacy alongside the likes of Ronald Reagan and FDR.

Remember all the talk that Bush's scheme will "pre-fund" Social Security rather than become a sea of transition costs?

Pre-funding these systems, [Rob Arnott] argues, "is basically irrelevant." And (in my own words) it matters little whether the system is pre-refunded with Treasury bonds or privately held stocks. The fact is that both of these financial assets represent a call on future production. If that production could possibly be saved, like squirrels ferreting away nuts for a long winter, then Treasury IOUs or corporate stocks might make some sense. But they can’t. Future healthcare for boomer seniors can only be provided by today’s teenagers, twenty-somethings, and even the yet to be born. We cannot store their energy today for some future rainy day.

And privatization won't solve the problem:

While these paper assets may "pay" for goods and services, their value will be market adjusted in future years to exactly match the quantity of things we buy, and that quantity will be substantially a function of the available workforce and the price they command for their services. This is a concise way of saying that the value of Treasury bonds and even stocks will be valued down in price as they are sold to pay for future goods and services, and that the price of these goods and services will be marked up (inflation) to justify their reduced supply.

The real solution for long-term retirement security, he argues, is reducing the budget deficit, not gutting Social Security:

By reducing budget deficits now, and especially that portion of the deficit owed to foreign governments, we would be able to keep more of our domestic production within our borders and therefore available to senior citizens.... Similarly, lower deficits ultimately should result in lower future inflation, reducing the burden on seniors with fixed incomes and making it possible to channel more real goods and services in their direction. President Bush’s theoretical prioritization of fiscal conservatism is therefore a promising ray of hope in this Social Security razzle-dazzle, but I remain to be convinced of his sincerity and/or discipline on this particular issue.

He does not dismiss the demographic shifts which will put additional pressure on Social Security -- that is real -- but he sees no chance that privatizing the program will change that.  He argues that the most likely solutions rely on increasing production from employed workers (not productivity per worker), likely either through more immigration (pissing off the right) or a later retirement age.

White House Deception in Action

OK, so we had the whole Social Security privatization -> private accounts -> personal accounts -> hugs from your mother.  Yesterday Brad DeLong showed more explicit evidence of White House deception in action over the issue, and this time the Washington Post is the patsy.

Of course, when Bush can't even count on conservatives in his party to endorse his plan when he comes calling, as Josh Marshall documents regarding the president's whistle stop in Montana, and when the Ways and Means subcommittee chair who would be managing the privatization bill in its early stages begins undermining its premises in public, as the diligent Mr. Marshall also points out, then the next logical step is to become the thought police.

Yet more from Chapter 5 of 1984:

It was a fact that if Syme grasped, even for three seconds, the nature of his, Winston's, secret opinions, he would betray him instantly to the Thought Police. So would anybody else, for that matter: but Syme more than most. Zeal was not enough. Orthodoxy was unconsciousness.

Updates

Before I turn my attention to other tasks, at least until tomorrow morning, three quick updates on topics I have blogged about:

• DOJ's Inspector General has issued the report on the FBI's $171 million vaporware, Virtual Case File (VCF).  The tone is scathing: Poor management from the beginning, shifting goalposts, inadequate contingency plans (that is, any), a lack of technical expertise both by the FBI and its contractor.  Here's the bit that sums up their incompetence (on page 24):

"The lack of redundancy and resiliency in the system was seen as a major flaw because the design failed the basic 'can of soda' test. This test simply shows that if a can of soda were to be spilled on one of the servers, causing it to fail, that server’s backup would also fail because it was located directly below and would also be damaged by the liquid."

• Cartoon rabbits remain a threat to the very fabric of American society.  Can't you tell just by looking at him?  My favorite bit -- if by "favorite" I mean "vomit-inducing" -- from the CNN story on the continuing tempest in a teapot (emphasis mine):

"Tolerance and diversity 'are almost always buzzwords for homosexual advocacy,' Dobson wrote. 'Kids should not be taught that homosexuality is just another 'lifestyle' or that it is morally equivalent to heterosexuality.'"

• I'm sure you've heard by now about what we might call the Mid-Evening Massacre from last night.  Like Archibald Cox being fired under orders by Nixon because Cox was an honorable man getting a little too close to the truth, Dennis Hastert ordered a purge of anti-DeLay members of House Ethics and replaced them with pliable, ethics-challenged friends of the leadership.  Read about it at Talking Points Memo, the Stakeholder, and Off the Kuff (together with info on a third DeLay donor who has flipped and will testify for the prosecution).

A New UN Blog From Peter Daou

Since I don't quite have the clout of some others in blogtopia, I haven't made a practice of posting "say hello to" about blogs I like or have seen.  Chances are, by the time they get to me most of you have found them already.

That said, I want to let you know about a brand new blog which may be of interest to my fellow internationalists in the house.  Peter Daou of the Daou Report now has a blog, less than 24 hours old, under the auspices of the U.N. Foundation called U.N. Dispatch.  And what timing he has, with the release of the Volcker interim report.  Check out his new project, a welcome addition to the debate.

Where You Stand Depends on Whether You Sit

If you haven't seen it yet, the Washington Post has a nice little story about the reaction of members of Congress during the president's speech, specifically whether to  stand in rapturous applause or to sit in uncomfortable silence.  Little there that we didn't know already, but it is nice to see who publicly committed to oppose the president, especially on the GOP side.

To follow on my previous post, it is ever more clear that Bush can't count on Snowe's vote to gut Social Security.  In fact, by the count of who sat during that portion it appears the president will be lucky to find a simple majority in the Senate, let alone a filibuster-proof supermajority.

Maine's Senators on Social Security

As part of the blogtopia-wide search for what our members of Congress had to say about Bush's SS privatization plan outlined in the SOTU, here is what my two senators, the pivotal moderate Republicans Snowe and Collins, had to say.  First Snowe (Portland Press-Herald):

Sen. Olympia Snowe, who will play a crucial role in the debate as a member of the Finance Committee, insisted that changes in Social Security can't jeopardize guaranteed benefits for the elderly. She voiced concern about running up potentially $2 trillion in debt if workers begin diverting about one-third of their Social Security payroll taxes into personal accounts.

Bush pledged in his State of the Union speech to "listen to anyone who has a good idea to offer." Snowe welcomed his offer to work with Congress.

Now Collins:

Sen. Susan Collins praised Bush for tackling such an important generational issue, which she contends is so complicated that Congress should merely study it this year and legislate next year.

But she is waiting to hear whether Social Security will continue to guarantee benefits to all participants, even if private investment accounts are added, as Bush wants.

"He made a strong case that Social Security solvency over the long term is a problem," Collins said. "I would like him to answer the question of whether or not there would be a guaranteed benefit under Social Security regardless of how one's personal account does in the market.

"I think we need a guaranteed benefit as we have now," she said. "I want to make sure that people who work their whole lives are not in a situation where a bad experience in their personal account plunges them into poverty."

So, what to make of it?  First, I would have been surprised to hear any Republicans take the president on immediately after the address.  Snowe, for one, has made it clear in the past she's opposed to privatization.  The fact that she didn't say so again right away is not necessarily so dramatic.

Others on the GOP side of the fence made similarly conciliatory comments.  What is important to me, especially for those who aren't "loud and proud" members of Josh Marshall's Conscience Caucus, is the extent to which they make unequivocal commitments to nonnegotiable conditions.  The tighter that fence is drawn, the more impossible the task for the privatizers to find a plan that satisfies a majority coalition.

Must guarantee benefits for the elderly?  Check.  Must protect from losses in the market?  Check. Concern about the debt?  Check.  That doesn't leave much room for privatization.

And Collins would prefer studying it for a year and legislating next year.  That, of course, would be the death knell of privatization because you can be sure any enthusiasm among moderates and those in retiree-heavy districts will be sapped in an election year.

U.S. Complicity in Oil-For-Food

For all the rightwingers who used questions about the oil-for-food program to undermine Kofi Annan and disparage the U.N., a question:

Where is the outrage about the complicity of the U.S.?  CNN reports, and this won't be the last we've heard.  Not only that, but it was not just some bureaucratic oversight but instead a tool of foreign policy.  That's right, at the same time the Bush Administration was dismissing the U.N. as corrupt and inefficient, they were manipulating the program in order to shore up support among Iraq's neighbors.

Let's bottom line it: The Bush Administration helped finance Saddam Hussein.  Well, isn't that rich.

Addendum: Yes, this occurred under Clinton's watch, too.  We can't be happy about that.  But he wasn't the one guilty of gross hypocrisy on this issue by using it to undermine the authority of the U.N.  Not to mention the whole invasion thing.

A TSP of Sugar Makes Privatization Go Down

One thing to listen for in tonight's speech and the class five hurricane of spin afterward is for comparisons by Bush and friends between Social Security privatization private accounts personal accounts and the Thrift Savings Plan (TSP) for federal workers.  (The Hill thinks it will come up, too.)

If it works for our federal civilian workforce, wouldn't it work for the rest of us?  Here are a few ideas to ponder if they try to use TSP as a model:

• On the plus side, the TSP has very low fees -- eleven cents per $100, by one estimate -- but they are so low that if it were copied for Social Security, Wall Street would be decidedly lukewarm toward the proposal, as the Hill reports.  Well, at least Bush would be able to say it's not a windfall for Wall Street, but politically he would lose allies he was counting on to help push privatization.

• That said, how do the fees stay so low?  One reason is that management of the fund is handed to a single firm, Barclays.  That will, shall we say, annoy other Street firms, who will press to open the program up.  But that would result in higher fees, tighter regulation or -- most likely -- both.

• Another reason the fees stay low is that federal agencies -- i.e., the workers' employers -- pick up a substantial portion of the overhead themselves.  This investment ranges from record keeping to investment advice.  So, do you think your average small business would be willing to do that, not to mention your average regional grocery store chain?  Think again.  Either the federal government would have to step in (administrative fees through the roof) or this is a heavy burden on businesses.  Or just pass it on to the workers themselves and leave them twisting in the wind.

• But it is said that the risk under TSP is very low for federal workers.  Yes, because they are given only five investment options.  Will the Cato and Club for Growth people still be as enthusiastic for a program which nearly eliminates individual choice?  Isn't that part of the point of privatization for them?

• It does not, however, eliminate risk.  Government Executive notes the retirees who saw their TSP accounts drop just a few years ago.  Of the five, one fund lost money in 2000, 2001 and 2002, while two more that had been created in 2001 didn't turn into the black until 2003.  Only two of the five funds saw modest returns during that period.  Brad DeLong, though a lukewarm fan of the TSP option, reminds us that even with only five options, there is plenty of room for people to make stupid mistakes.  And, during a downturn in the economy, when three of the five funds under TSP lost money, I don't like those odds even for the less stupid investors.

So, be very cautious of claims that TSP automatically translates into reasonable privatization for Social Security.  With tens of millions more workers and retirees covered, and with private businesses taking on a much greater administrative load, you can bet next month's Social Security check that it won't be nearly so easy.

Counting Votes in the Senate

Josh Marshall, quoting CQ, said yesterday that Senate Democrats are unified against privatization of Social Security, based on comments Reid made that all 44 would oppose diverting payroll taxes to private accounts.

It may have been premature elation.  The Washington Post dissects Reid's comments and finds that he acknowledges not having spoken with all 44.  On the one hand, that's partly the work of whips.  On the other hand, with an issue like this it requires the personal touch of a party leader, and it is clear there is more work to be done.  So, before we assume the Senate is locked up, the fight is far from over.  That said, it also seems clear that the head count is closer to 50 than 60, which means the plan is in real trouble in the Senate.  We'll see how that holds post-State of the Union.

Who's Smiling?

From CongressDaily, a quote of the day:

"That must be my wife -- saying that I'm not smiling."
    -- Senate Budget Chairman Gregg, commenting today when his cell phone went off during a hearing on CBO's updated budget and economic outlook.

Nor was anyone in the White House smiling when the CBO reported that Social Security will stay fully funded for a bit longer than previously forecast, and drop down to payments of 78 cents on the dollar in 2052.

Aw, who am I fooling?  They don't care about no stinkin' facts!  Which means Gregg has some 'splaining to do.

Blogtopia is a Strange and Wondrous Place

Well in advance of International Talk Like a Pirate Day, Crooked Timber has one of the finest post + comment combos, well, ever.  And you should also check out the comments on Brad DeLong's post when he linked to it.

If that don't give ye a bellylaugh, me hearties, then my foc's'le's a yardarm!

Freedom Is Slavery

Oh, yes, I truly cannot wait until tomorrow evening to hear what new and glorious words will replace the old, negative, tired words of the past!  But we needn't wait much longer, because CongressDaily (via Josh Marshall) has given us a preview:

At the center of the GOP pitch is a language "branding" plan that Republicans hope will undercut Democratic criticism of Republican plans. For instance, the GOP has been pushing to move from describing the investment accounts as "private," preferring to use "personal," which they believe is less loaded politically. Similarly, Santorum said Friday he preferred to avoid calling costs associated with the creation of the accounts "transitional," favoring the use of "prepaying." A senior GOP Senate aide acknowledged that both of these semantic changes are part of the party's broader strategy to reframe the Social Security debate.

Glorious day!  I feel so much better already knowing that Social Security won't be privatized but made personal -- just for me! -- and that the costs of the new program won't be costs at all but instead prepayments -- just like the squirrel that hides a nut for winter!

Yes, I feel so very reassured knowing that debt is not really debt and that while privatization is good, private accounts are plusgood and personal accounts are doubleplusgood.

We have read it all before (continuing chapter five):

'The proles are not human beings,' he said carelessly. 'By 2050 earlier, probably -- all real knowledge of Oldspeak will have disappeared. The whole literature of the past will have been destroyed. Chaucer, Shakespeare, Milton, Byron -- they'll exist only in Newspeak versions, not merely changed into something different, but actually changed into something contradictory of what they used to be. Even the literature of the Party will change. Even the slogans will change. How could you have a slogan like "freedom is slavery" when the concept of freedom has been abolished? The whole climate of thought will be different. In fact there will be no thought, as we understand it now. Orthodoxy means not thinking -- not needing to think. Orthodoxy is unconsciousness.'

Support for Our Dead Troops, But Not Live Ones

A couple days ago, our friends at the Samuel Taylor Coleridge Foundation brought our attention to the fact that "imminent danger pay" for our troops, adjusted for inflation, is less than a third what it was during World War II.  That factoid, and plenty more, comes from Soldiers for the Truth.  The SFTT article also points out that the fiscal excuse -- we just don't have money budgeted -- is due at least in part to the bizarre way the pay is allocated (support personnel in Bahrain, too?).

Now according to the Washington Post,  the Pentagon has said it will double death benefits for families of those killed in Iraq and Afghanistan.  I applaud that decision.  It should be noted, however, that the article says it was made "under pressure from Congress."

Indeed.  The administration has shown that when it comes to actual, material support for our troops and their families, it just doesn't fit the new fiscal reality.  Already spent that money on tax breaks so that millionaires can buy brand new chinchilla coats.  At least someone's staying warm!

Wrong Crisis

Sure, there's an entitlement crisis looming, just not the one Bush wants us to obsess over.  The World Health Care Congress is meeting in Washington, and one of the speakers today was CBO chief Douglas Holtz-Eakin.  Reuters reports that the message he gave to health care industry bigwigs and mediumwigs was that Medicare, not Social Security, poses a looming fiscal crisis.  Whaaa...?

Worse, he was so off-message that he might as well have been speaking Manx.  He said that current efforts by HHS to lower health care costs and reduce the program's burden amounted to "baby steps."  He also said that, well, let's listen:

There is not a single item -- technology, disease  management and tort law reform -- that is the answer.

Tort reform isn't the answer?  But that's the magic fairy dust that will cure everything from health costs to the current accounts deficit!  Can't trust a nonpartisan economist to say the right things anymore, can you?

Oh, those darn facts are ever the more inconvenient!

Addendum: On Wednesday, the Senate Finance Committee holds hearings on Social Security and Holtz-Eakin will testify alongside SSA Chief Actuary Stephen Goss.  This will be one to track.

Civil Service Defense

It looks like Bush has hit yet another snag in selling his agenda to fellow Republicans on the Hill.  Recall a few days ago we heard about proposals to further erode civil service protections beyond Homeland Security to the entire federal civilian workforce.

It looks like the two chairs with responsibility over such a change are not hot on the idea.  CongressDaily reports (and Government Executive reprints) that Susan Collins, chair of the Senate Committee on Homeland Security and Governmental Affairs, and Tom Davis, chair of the House Committee on Government Reform, see no need to rush headlong into the restructuring.  Collins see the rules at DHS as an "experiment" rather than a blueprint.  It helps that, as Republicans go, Collins and Davis tend to be among the reasonable ones most of the time.

Waxman, ranking Dem on Govt Reform, notes that Bush's original rationale for the civil service exceptions -- the needs of defense and quick response for anti-terror efforts -- do not apply to, say, the Bureau of Land Management or the Office of English Language Acquisition, Language Enhancement and Academic Achievement for Limited  English Proficient Students (now that's a mouthful, even for native speakers!).

Darn those inconvenient facts yet again!

A New Day

The big story, of course, is the Iraqi elections.  I have been busy for the last three days, first with my wife's birthday and then with work (yes, on a weekend), and so I have not looked at my usual blog haunts at all.  Tomorrow I get back to my sorta-normal routine.

What this means is that I can give my judgments unsullied by the blog echo chamber; put another way, I have not benefited from the wisdom of others who no doubt have been able to follow this much more closely than I.  And so will keep this short and simple until tomorrow.

It appears as though turnout was higher than expected, with the Guardian estimating it at 57% and the New York Times potentially above 60%.  That sounds very good, especially in comparison with the US where we didn't have to worry about bombs.  (While it doesn't excuse the ten-hour lines, it does put them in perspective a bit.)  What is more important than the total figure is the variation in turnout among major groups and across regions.  This is the kind of news that will take a little longer to trickle in.

The Times reports that turnout in Sunni areas might have been 40%.  This is, of course, the key since any government must account for possible Sunni resentments.  Even if they win a disproportionately low number of seats due to lower turnout than among Kurds and Shiites, it would be prudent for the new government to listen carefully to Sunni concerns in drawing up the new constitution and not dismiss them.  This is, after all, merely an intermediary step, though an important one.  Before people get all self-congratulatory about the results (I'm looking at you, George!) all players need to start planning carefully for the next stage.

The elections were an important and, it appears, positive step, but it was only a step.  Nor, just because the bombings weren't quite as devastating as many feared, does it mean the security situation has suddenly become Mayberry RFD.  I'm very happy it wasn't a bloodbath today and that so many Iraqis voted.  Now let's see what those elected do with this power, and how strong a hand the U.S. shows in directing them.

Maine Rx Clears Another Hurdle

Not since the days of Taft and Hoover has anyone been able to say, "as Maine goes, so goes the nation."  While FDR swept aside the state as an electoral bellwether, it is the decidedly New Deal flavor of Maine's prescription drug discount program that is causing the rest of the country to look down east.

The program gives the state the power to negotiate prescription drug prices with pharmaceutical companies on behalf of those too poor to have prescription drug insurance of their own.  From the start it was the target of lawsuits by Big PhRMA, including a case that eventually made its way to the Supreme Court in 2003.   You can check out the time line here.  Though the state won the case, it made some revisions -- largely involving an income cap for beneficiaries and elimination of open enrollment -- and relaunched it at the start of 2004, when it ran into a new set of legal challenges.

The Portland Press-Herald a year ago gave a rundown of the relaunched program.  Several other states have programs in various stages of development and legal challenges, including Michigan, Georgia and California, but the consensus is that the Maine version is the model.

Friday the state won yet another round in federal court, as the Press-Herald reports again.  The sticking point has been a provision which permits the state to punish drug companies that fail to provide discounts by requiring doctors to get prior approval from the state to prescribe drugs from such companies to Medicaid patients.  In order to avoid that bureaucratic hurdle and the potential losses that would result, companies have an incentive to negotiate discounts with the state.  As it is however, the state has been able to meet its targets without invoking that provision.