Numbers Crunching

Actuarially Unsound
By Arnold Kling 02/24/2005
http://www.techcentralstation.com/022405C.html

The Author remains a bit peeved, as he had a good Post on this Issue written, and the Computer ate it. The Above article should be read to understand the foolhardy practice of treating future estimates as Gospel. The Author agrees with Arnold this time, though he must point that the accrual real investment rate(interest rate or Dividend) must always be less than the real rate of economic growth. The Children should know the difference is composed of the Labor Costs and Profits of the Investment industry itself, plus a capsule of intermediate taxation. Arnold also misses or ignores the fact there is a 'floor' real accrual rate which must be met to validate transfer from the current Social Security system to Private Accounts by way of Public debt.

The Author asserts this 'floor' real accrual investment rate must be 1.647% earned on Private Accounts, simply to make a 'Profit' on funding Private Accounts by Public debt. This does not contest a previous Arnold argument that there is no real increase in Public debt(though this is also very contestable), but the inherent Cost of Public debt Service when in the form of salable Notes. Exterior redemption of debt necessitates re-issuance and financing of interim Interest payment. Many Economists would protest such a largesse assigned to such Debt Service, but they are equally mystified by the multiplicity factors of Public debt(that means they are surprised at the rate of Debt growth).

The final issue which must be raised comes in the form that the Above 'floor' real accrual investment rate will subtract from the real growth rate of Private Accounts--either through higher taxes or higher Interest rates. This realizes the nominal returns on Private Accounts investment must subtract not only Inflation rates, but the 'floor' accrual rate. Almost all Economists estimate that actual real economic growth will not exceed 2% per year over this current Century, so the real realizable rate on Private Accounts will be 2-1.647% after subtraction from the nominal growth of the Inflation rate.

This Author will introduce a real 'Spoiler' to the equation at this point by saying that economic size is a function based upon the variable of Population size. This is not nominal size, but the size of fully-employed Labor elements, both Capitalization and Production rates set for such full employment. It relates a complicated manner of stipulating that real economic size will begin to shrink after 2021, according to the Author's own estimates. lgl