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Minyan Mailbag - Deficits and Retirement Plans

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Good morning gentleman,

This quick random thought might be an oversimplification at best and a total misunderstanding at worst. However I would appreciate it if you can let me know if the logic behind the following is correct or not:

President Bush seems intent on some sort of overhaul of the US retirement benefit system whereby he would allow younger workers to fund their own special retirement 'account'. Assuming he can get this done, would you agree that the individuals' funds that are contributed to these accounts would increase the US personal savings rate, which seems to be at the heart of the current account debacle.

The logic behind this is that current individual's contributions are not used to fund any account, but instead are used by the government in their day-to-day spending. AS LONG AS the government does not increase its deficit to makeup for the shortfall of funds from the contribution. Big if here! Although it wouldn't surprise me to see the government doing some house cleaning during its first two terms.

Seems like a short-term solution to increase the US savings rate and addressing its current account problems. This 'solution' doesn't address the long-term unfunded liability problem, although the Fed seems intent on inflating it away anyway.

Thanks much and have a happy holiday!

Malta Minyan GG

GG,

The savings rate as calculated would be unchanged. The savings rate equals after-tax (after deductions) income less spending. Under the President's plan, the deduction would still occur and the deduction would not be reclassified. The only difference is that the deduction would go where the wage earner wants it to go.

I think you are right on the big "if". As the deductions will not go into the general fund and because the government currently "borrows" social security funds for its spending, it makes sense that the government would have to increase borrowing to replace them.

It is assumed that people will put these deductions into stocks, or at least some significant portion. So essentially what we have is the government borrowing more money and putting it into the stock market. This increases risk, for there is no free lunch.

Prof. Succo

No positions in stocks mentioned.

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