Great op-ed by Paul Krugman today pointing out that economic assumptions the privatize Social Security use in forecasting doom and crisis are at odds with the economic assumptions they use to project high returns from the equities market. The argument has been circulating by others for a while, but it’s put well here and in any case worth repeating.
In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.
The price-earnings ratio - the value of a company’s stock, divided by its profits - is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it’s about 20. Where would it have to go to yield a 6.5 percent rate of return?….By 2060, it would have to be more than 100.
…[I]f the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.
Kevin Drum follows up on Krugman’s article with some more numbers and concludes “no matter what [productivity and growth] numbers you use, Krugman’s basic point is sound: if you’re going to compare the current Social Security system to a privatized system, you need to use the same economic assumptions for both. Instead, privatizers like to play a shell game where they use gloomy assumptions for Social Security and rosy assumptions for privatization.”
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