CNN In the Money, February 5, 2005


CAFFERTY: All right. When we come back, the big fix. President Bush wants to straighten out Social Security, but not everybody thinks it needs straightening. We'll get the hands off take on that straight ahead. Plus the human side of the Enron collapse. Find out about the personalities behind the disaster that cost the investors billions and some of the principals and key architects of the collapse are out, walking around free as a bird. And the digital version of singing in the shower. Listen in, but cover your eyes. This is our fun site of the week. Stay with us.

CAFFERTY: Well, in case you fell asleep during the state of the union address and let's be honest, some people probably did, here's the executive summary. Social Security reform is at the top of the president's to-do list. For the first time, he gave some specifics on his plan, including a couple of key detail of the proposed personal retirement accounts. Joining us now, "New York Times" op-ed columnist Paul Krugman, who is convinced, as are a number of people, that these private accounts for Social Security are not a very good idea. Paul, thanks for coming back on the program. It's nice to see you again.

PAUL KRUGMAN, "NEW YORK TIMES": Good to see you.

CAFFERTY: Help me out here. To me these things, at least on the surface, seem similar to an IRA or a 401k. It's voluntary. You put a small percentage if you want to into these things. You invest in broadly diversified instruments. For example, the S&P 500 index fund and then if you leave the money in there, history suggests you're going to get a return of 7 or 8 percent over the lifetime of the investment. So somebody who is 25, 30 years old, leaves the money in there they're going to be fine. What's the problem with these?

KRUGMAN: OK. Everybody will tell you you should invest in a mix of stocks and bonds for your retirement. What these plans do, actually boil it down, it turns out that it's going to be asking you to borrow, to mortgage your Social Security benefits in order to buy stocks and hope that it turns out all right.

CAFFERTY: How do you mean, borrow?

KRUGMAN: This has been dance of the seven veils. They've been revealing details bit by bit. But in the background briefing that went with the state of the union, a senior administration official said -- and I'm making this clearer than he did -- that what you'll do is if you put your money -- if you had put your money in bonds, government bonds, you would get about a 3 percent rate of return after inflation. And at the end, you'd be able to buy yourself an annuity that would pay about $5,000 a year. So what we're going to do is if you choose private account, we're going to reduce your Social Security benefits by $5,000 a year. So if you just buy bonds, you end up exactly where you started, no net benefit and he said that, no net benefit if you get a 3 percent rate of return. So it's really a loan. It's not letting you invest your money. It's borrowing against your Social Security benefits to invest. So if you get more than 3 percent, if you buy stocks, so you're borrowing to buy stocks and stocks do well, then you end up ahead. This is speculating on margin. And if the stocks do badly, if you end up with your private investment account only yielding you enough to get a $2,000 a year annuity, they're still going to dock your benefits by $5,000 so you're going to be worse off. You're taking on a lot of risk. The other thing we learned from all of this is, from a senior official again is that nothing -- this has no impact on the solvency of Social Security. Now I argue, I actually say it's negative. But this has nothing to do -- all of the crisis that's been talking about the private accounts, by the administration's own admission do nothing to deal with that crisis. So this is just an add-on to whatever they're actually going to do about the finances of Social Security.

SERWER: Paul, I know what the problem is. You just have to figure out which stocks are going to go up 50 a year for the next 25 years, you'll do just fine. You mention the word crisis and you talked about that. There's a lot of sort of semantic difficulties here. The president has backed off the use of the word privatization, backed of the word crisis, which is very interesting to me. But can you talk about the problem because there's no doubt that over the coming decades, this system will run into problems in terms of funding. But how much of a problem is it and how would you define it?

KRUGMAN: Well, I believe we should think, you know, a reasonably long time ahead, but not into the science fiction era. So on a 75- year ahead basis, the Congressional Budget Office, which I think is probably the best estimates out there, say that we have a funding shortfall of Social Security, about 4 percent of GDP. Which is, you know, you should do something about that. It's not especially urgent because that's not a huge number. It's about one-fifth the size of the Bush tax cuts, which are about 2 percent of GDP and if they're made permanent, that's forever. So this is a -- you know, you probably would want to study it, because this is -- we want to be very careful. You don't want to react to a completely nonexistent crisis.

SERWER: So why is the president feel compelled to address it in your mind?

KRUGMAN: Oh, because this is not about the solvency of the system or anything like that. This is about ideology. This is about demolishing -- Steven Moore of the Cato Institute and the Club for Growth who is franker than the administration, said Social Security is the soft underbelly of the welfare state and we want to jab a spear through it. This is not -- this has nothing to do -- Franklin Roosevelt's family is understandably, extremely upset because this is actually an attempt to demolish FDR's legacy.

LISOVICZ: But Paul, wouldn't you agree that something has to be done because the numbers are undeniable. In the future, there are going to be fewer workers supporting many more retirees and it would require big increases in taxes. I'm seeing, perhaps, a 50 percent increase.

KRUGMAN: No, that's --

LISOVICZ: ... in Social Security taxes -- OK, well, then what would you do? If you had control of Social Security, what would you do?

KRUGMAN: I would look for a little bit more revenue to bolster the system. I'd look for some -- you can do that in various ways and I think we need to talk about how we should do that. And I would look for some ways to reduce the benefit costs in ways that make sense. There is an issue about too many people taking early retirement, for example, which is a relatively manageable thing, does not strike at the fundamentals. But look, on the scale of these things, we are talking about 15 years from now, Social Security will -- because of the aging population -- benefits will be something like 1 percent to GDP higher than they are now. Right now, we have a deficit in the general fund, the -- you know, the deficit outside the Social Security of the U.S. government of 5 percent of GDP. Now, the crisis now is -- has to do with tax cuts, has to do with cutting taxes while we're fighting a war, and here we are saying, oh, but let's worry about the demographics, you know, it doesn't really have full impact until about 2030. I'm all for thinking ahead, but this is a diversionary tactic.

CAFFERTY: We're almost out of time. But let me just ask you one other -- what did you think of that election over there in Iraq? We talked about the war and the whole thing going on over there. What did you think?

KRUGMAN: Look, I think we've been given another chance. You know, three times by my count so far the Bush administration has passed up the chance to really try to hand over power to a domestic group in Iraq. Essentially, we're going to end up handing the keys to Sistani. We know that. The question is are we going to do it gracefully? We passed up many chances to do it gracefully and we may have another chance now.

SERWER: All right. Never short of opinions, Paul Krugman, op-ed columnist for "New York Times" and a professor of economics at Princeton University. Thanks for coming on.

KRUGMAN: Thank you.

SERWER: Coming up after the break, the parent trap. SBC is buying its former corporate big momma. Find out how Wall Street is liking the deal for AT&T. Also ahead, big game hunters from the glitz to the gridiron. We'll look at who's winning cash wise in this year's Super Bowl. And you've got to spend it to make it baby. EBay is changing its fees for sellers. We'll tell you why some people don't like that.

LISOVICZ: Now let's take a look at the week's top stories in our money minute. The Fed's interest rate hike parade keeps marching on. Alan Greenspan and company boosted short-term rates another quarter point and the post-decision statement from the Fed reads just like the last one, pointing to more rate hikes in the future. Under worked and over paid, that's what a newly released report says about former New York Stock Exchange chief Dick Grasso. The NYSEv study concludes Grasso set his own unimpressive performance targets and made about $144 million he didn't deserve. But Grasso wasn't grabbing it all for himself. The report says he made sure his secretary got a $240,000 annual salary and his two drivers, well they made $130,000 a year.

Originally broadcast, 2.5.05