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By JEANNINE AVERSA, AP Economics Writer Fri May 27,11:21 PM ET

WASHINGTON - The centerpiece of the Bush administration's
Social Security overhaul — letting workers set up personal investment accounts — would "pose fiscal challenges," International Monetary Fund staff say.

The assessment was contained in a broader examination of the United States' economic performance and policies. The 184-nation
IMF regularly conducts such examinations with member countries.

Under President Bush's plan to revamp the Depression-era retirement program, workers would be allowed to divert a chunk of their payroll taxes into individual investment accounts in stocks and bonds.

While these accounts "hold the potential for raising the return on Social Security contributions, they would also imply a significant increase in federal deficits and debt in coming decades," the IMF staff report said.

Treasury Department spokesman Tony Fratto, however, contended that "our Social Security reform effort, including personal accounts, will significantly reduce America's long-term debt obligations."

The administration has estimated that costs to transition to such accounts over the next 10 years would be $754 billion.

Federal Reserve Chairman Alan Greenspan, who has urged a go-slow approach in setting up the accounts, has expressed concern that the government's increased borrowing needs might boost a variety of interest rates.

The accounts by themselves won't fix the solvency of the retirement program.

With a wave of baby boomers starting to retire in just a few years, policy-makers appear right to limit benefit growth, the IMF staff said. But other options also should be considered such as an increase in the retirement age or raising the cap on the Social Security payroll tax, the IMF staff said.

In other areas, the IMF staff:

_ Suggested curbing tax deductions, such as the generous treatment of mortgage interest, or introducing a national consumption tax, as part of the administration's exploration of a tax code overhaul.

_ Urged the administration to work on cutting both its budget and trade deficits, which can pose risks.

Those shortfalls are being financed by foreign investors. If foreign investors were to lose some of their appetite for accumulating dollar-denominated assets at the current rapid rate and unload their holdings, the prices of U.S. stocks and bonds could plunge.

But other options also should be considered such as...raising the cap on the Social Security payroll tax.

It seems to me that raising the cap should be the first action taken to shore up Social Security, and only if that proves insufficient should there be any talk of reducing benefits.

It's no surprise that raising the cap is a non-starter for the Republicans, who cater to the rich. What is surprising is that the Democrats seem to be against raising the cap as well.

I agree. At the very least, a modest cap push should be implemented. I don't know, maybe up from the first $90k to $110k, $115k...So far, any and all proposals for a raise have been more than that.

The trick is doing something sane (like raising the cap) without doing something destructive that would more than offset it (like private accounts).

Ryan

The 'International Monetary Fund'?

Sounds *French* to me.

How long until the U.S. has to be put on an IMF imposed austerity program??

When you're the world's biggest debtor nation, it can't be too far off.

Stretcher Case wrote:When you're the world's biggest debtor nation, it can't be too far off.

OTOH, because the US debt to the world is denominated in dollars (which the US can print/create without limit), there's not much of a default risk. Such are the benefits of printing what (most of) the rest of the world accepts as the primary reserve currency. Countries like Argentina can only burn with jealousy...it would be a much simpler matter to repay their 102 billion in (defaulted) loans if they were denominated in Argentine pesos.

Plus, as government economists relish pointing out, the world loves to lend (the economists prefer the word "invest") money to the US, because we have, and will continue to have, the most flexible, dynamic, free, resilient, responsive, and richest economy on earth, forever and ever amen. Or at least as long as we keep electing wealthy Republicans, who understand such miraculous economic inventions like the stock market -- which can provide retirement *and* Social Security for the whole country -- and how asset appreciation "creates wealth."

Federal Reserve banker Ben Bernanke went so far as to say that the US is actually doing the world a favor by "sopping up the 'glut' of savings." Wow...between that and bringing democratic freedom to Iraq, we must be a much beloved country.

Forever is a long time.

Oil is increasingly denominated in Euros, so we're now having to compete with another reserve currency. At $52 per barrel, that giant sucking sound you hear is the sound of new petroeuros being created.

When China opts to let the yuan float, look for yet another reserve currency to stand out.

Stretcher Case wrote:Oil is increasingly denominated in Euros, so we're now having to compete with another reserve currency. At $52 per barrel, that giant sucking sound you hear is the sound of new petroeuros being created.

So far, the idea of one central European bank setting the same "one size fits all" policy for all countries isn't working out too well. Economically red hot Ireland should have a different interest rate, for example, than Germany, which is in recession. Furthermore, the animosity rooted in nationalism (such as the British not being too keen on the French, who in turn aren't too keen on the Germans) seems to be always bubbling just under the surface, giving the impression that if push came to shove, each country would do what was in its own self interest.

There was some speculation that one of the reasons we invaded Iraq was because Hussein was pricing his oil in euros and the US can't tolerate any threat to dollar hegemony. IMO, though, as long as the Saud family is in power, we won't have to worry about OPEC adopting a Euro oil price.

When China opts to let the yuan float, look for yet another reserve currency to stand out.

Chances are that when the peg is moved, it will be very gradual...perhaps only a few percentage points at a time. China has little interest in allowing their currency to appreciate, especially as their "vendor financing" program with the US is giving them the business needed to quickly grow their economy and their power.

Even in the unlikely event of a complete float, what would be the case for the yuan being superior to the dollar as a reserve currency? Until China does more than pay lip service to intellectual property rights and introduces more transparent "law and order" to their opaque capitalism/communist Frankenstein economy, China/yuan will be perceived as riskier than the US/dollar.

Intellectual property concerns are overrated. In this country, our copyright laws are held hostage to the Steamboat Willie rule, hardly an argument for innovation in an economy.

Look, it all comes down to which country has the talent pool to develop and retain in building an economy. Since our country prefers to make plans on a quarterly basis and have its science initiatives held up by the likes of James Dobson et al., I see capital flows increasingly moving outside the U.S.

I agree with your other points though. In many ways, the Chinese "vendor financing" deal reminds me a lot of Japan's credit policies in the late-80's. However, shortly thereafter, Japanese credit dried up and the West Coast (whose banks were entirely Japanese financed) got crushed. The West Coast real estate bubble probably has another 12-18 months, tops. What happened to Japan after the late-80's?? An unending recession.

That's an interesting theory on the Saddam/Euro connection, I hadn't heard of that one before.

Stretcher Case wrote:Intellectual property concerns are overrated.

This article has an eye opening description of some of the shenanigans going on in the China auto business.

In this country, our copyright laws are held hostage to the Steamboat Willie rule, hardly an argument for innovation in an economy.

IMO you could argue that either way. I think there is a "sweet spot" for copyright protection, but "too much" protection is probably better than "almost none."

I hate companies like Disney and Mattel (Barbie) that go apoplectic at the slightest, most harmless infringement, but think it's OK to borrow from others. For example, the original Barbie is a blatant copy of the Bild Lili German doll from the '50's.

I'll never forget the anti-pirate system that Disney dreamed up for one of their software titles. The log in screen had an image of Mickey in a particular pose (one of 50), and you had to find the matching pose on a sheet that came with the software, which was medium red paper with dark red ink (to frustrate photocopying, I guess). That was such a eye busting chore to find the right Mickey...it was freakin' unbelievable!

Look, it all comes down to which country has the talent pool to develop and retain in building an economy.

The US had the edge when the most talented foreigners wanted to come here, the "land of opportunity." I think that's starting to change...for example, a bright young Chinese graduate might see plenty of opportunities in China and choose to stay there instead of coming here.

Since our country prefers to make plans on a quarterly basis and have its science initiatives held up by the likes of James Dobson et al., I see capital flows increasingly moving outside the U.S.

We certainly have our problems. On balance, though, I think the US is still thought of as one of the friendliest environments to quickly bring a promising idea to fruition and make lotsa money.

...shortly thereafter, Japanese credit dried up and the West Coast (whose banks were entirely Japanese financed) got crushed.

Can you provide a link for further reading on this relationship between West Coast banks and Japan?

The West Coast real estate bubble probably has another 12-18 months, tops. What happened to Japan after the late-80's?? An unending recession.

I'm surprised it has gone on this long...South Florida seems even frothier. Japan had a huge real estate bubble in the '80's as well, but supposedly the US bubble hasn't reached that stage of excess. In fact, other countries, such as Australia, Great Britain, and Spain, are often mentioned as having even higher house appreciation than the US.

That's an interesting theory on the Saddam/Euro connection, I hadn't heard of that one before.

Yeah...take it FWIW.

Dob wrote:I'll never forget the anti-pirate system that Disney dreamed up for one of their software titles. The log in screen had an image of Mickey in a particular pose (one of 50), and you had to find the matching pose on a sheet that came with the software, which was medium red paper with dark red ink (to frustrate photocopying, I guess). That was such a eye busting chore to find the right Mickey...it was freakin' unbelievable!

I'd say the original B&W SimCity beats that. Same deal with the maroon paper, but 4 pages of little circle symbols. One of the teachers in my middle school actually took the time to hand copy all 4 pages so it could then be photocopied. I think I might even have a copy of that at home somewhere (not sure if I still have a floppy with the program any more, though).

USA Today has a thorough article considering the pros and cons of raising/abolishing the cap on Social Security taxes.

Dob wrote:USA Today has a thorough article considering the pros and cons of raising/abolishing the cap on Social Security taxes.

Ha ha ha ha. The rich don't pay an effective rate of 50%, that's hog wash. The federal rate with deductions and other tricks gets down to an effective rate of 18%.

I used to be for means testing, but that's a non-starter with an insurance program. Turning Social Security into a welfare program leads to eventual elimination. No one on the Democratic side is talking about eliminating the cap, just raising it.

Mindless article, almost a cut and past job from the Cato Institute.

Stretcher Case wrote:The rich don't pay an effective rate of 50%, that's hog wash.

The 50.3% resulted from simple addition... the author didn't claim that it was an "effective rate." In fact, the crux of the argument was that the rich would likely pay far less than that if the cap was eliminated.

Turning Social Security into a welfare program leads to eventual elimination.

Which leads me to ask, if Social Security is *not* turned into a welfare program, are its prospects for survival any better?

In any case, the conceit that "benefits are tied to contributions" is all but dead. We've been told over and over that contributions are spent as fast as they come in and that the amount of future benefits is subject to change (and the courts have agreed, IIRC). How many 30 year olds expect their contributions to be "waiting" for them when they retire in 37 years? It's a pyramid scheme...if the numbers are in your favor (many more workers than beneficiaries) you get your expected benefits...if they aren't, it's doubtful.

No one on the Democratic side is talking about eliminating the cap, just raising it. Mindless article, almost a cut and past job from the Cato Institute.

Although the article quoted a number of conservative viewpoints, I didn't see it as concluding that eliminating the cap was a bad idea. It did argue that "small increases" ($140,000) to the cap "don't help much," which is questionable...but where did you get the impression that the article is pushing personal accounts (Cato Institute)?