[User] Please transcribe this text

[Assistant] And so, if this is a coupon bond, say, paying 7%, you know, say the face is 100, it pays $7 forever, and 107 at the end, and the price is 105, what do you think the yield to maturity is going to be?


[User] Please transcribe this text

[Assistant] No one thinks it'll default, but its price is 105. What is the yield to maturity in that case?


[User] Please transcribe this text

[Assistant] You suppose, just vague guess. I just want a qualitative number.


[User] Please transcribe this text

[Assistant] 6.7, okay, that's qualitatively wrong.


[User] Please transcribe this text

[Assistant] Well, it's not qualitatively wrong, not qualitatively right. This is not, okay, it could have been better, but okay, so he's right. So what if, so, what if the pr, what if the price were 100? What would the yield to maturity be?


[User] Please transcribe this text

[Assistant] So if the price of the bond, if it's a 7% coupon bond, on principle, on face of 100, and its price is 100, price equal to the face, then obviously the thing that discounts


[User] Please transcribe this text

[Assistant] So it's not going to be 7%, and he said 6.7. Okay, so I think it would be a little


[User] Please transcribe this text

[Assistant] Worse than that, but that's qualitatively just what I asked for. Something worse than 7%.


[User] Please transcribe this text

[Assistant] That's, okay, so that's another number, okay, that's called, okay, so.


[User] Please transcribe this text

[Assistant] Okay, so let's, let's con- okay, so does it- okay, so I'm gonna come back to your question. It's a good question. So, do you see that the price- you all see that if you measured the yield to maturity on this bond,


[User] Please transcribe this text

[Assistant] Okay, the yield of it, so the bond, remember, pays 7, 7, 7, 107. Okay, and its price is 105.


[User] Please transcribe this text

[Assistant] Such that 105 equals 7 over 1 plus the yield, plus 7 over 1 plus the yield squared, plus 7 over 1 plus the yield cubed, plus 107 over 1 plus the yield to the tenth. Okay, that's 105. So, what we observed is that y has to be less than 7%.


[User] Please transcribe this text

[Assistant] Because if y were exactly equal to 7%, this would give us 100. But this bond is more expensive. So you're paying more to get the same payments you would.


[User] Please transcribe this text

[Assistant] Then the face, you're paying more than the face to get the same payment. If the price were equal to the face, it would be a 7% yield. So since you're paying more, you're getting a worse deal, so it's pretty obvious that if you want to discount this number to more than 100, namely 105, Y is going to have to be less than 7%.


[User] Please transcribe this text

[Assistant] Okay, so that's the first thing we said. Now what did he do? He gave a number and he said seven over, uhm,


[User] Please transcribe this text

[Assistant] Okay, so, that number that he gave is called the current, is called the, uh, current yield.


[User] Please transcribe this text

[Assistant] Another number of people gay give.


[User] Please transcribe this text

[Assistant] Okay, and he figured that was 6.7%. So let's believe him, that's 6.7%. Okay, now,


[User] Please transcribe this text

[Assistant] So, and the, and the, okay, how does that number compare to the yield to maturity?


[User] Please transcribe this text

[Assistant] And 107, okay, those are our payments. And then we could try, uhm,


[User] Please transcribe this text

[Assistant] If this, uh, yield to maturity, I'm gonna go equal the thing on the left divided by the, uhm, yield to maturity that we're guessing, uhm, height, uh, raised to this power.


[User] Please transcribe this text

[Assistant] Okay, and now I can just copy that. And I've got all these cash flows.


[User] Please transcribe this text

[Assistant] Oh, I see, yeaah, right, right, right, right, okay. So I have to, here I've got the, the, uh,


[User] Please transcribe this text

[Assistant] You're right, so I've gotta, okay, so there's a trick here, which I forgot, which is that the discount rate, the internal rate of return E, I've gotta put a dollar sign. Dollar E, dollar one. So that way it remembers the spot.


[User] Please transcribe this text

[Assistant] Alright, so anyway, that's it. So you see for each number here, I've got the payments for every year, and I've discounted them by taking this internal rate of return. Okay, and now I just have to sum all this. Equal sum.


[User] Please transcribe this text

[Assistant] Okay, so that's the thing I want to minimize and so now I'm going to tools, solver, min,


[User] Please transcribe this text

[Assistant] Oh, the original price, aha. Thank you very much. Okay, so we need the original price of $105.


[User] Please transcribe this text

[Assistant] Very good. So I see that preparing this would have helped. Okay, so here's the sum. So we just summed all these things. Okay, and here we're gonna, uhm, uh,


[User] Please transcribe this text

[Assistant] And it's extremely simple to do, and a child can learn how to do it. Okay, so we get solver and we solve all this.


[User] Please transcribe this text

[Assistant] And you should be able to use Excel with no problem at all. So uhm.


[User] Please transcribe this text

[Assistant] Okay, so the question is, what are the relationships between the current yield and the yield to maturity? And suppose there's some actual interest rate, so there's an actual, uh, market interest rate.


[User] Please transcribe this text

[Assistant] Of say, you know, 6% or something.


[User] Please transcribe this text

[Assistant] Okay, so those are the things that we want to sort out now in the next five minutes.


[User] Please transcribe this text

[Assistant] So let me go back to the notes and we'll re-ask all the questions here.


[User] Please transcribe this text

[Assistant] Suppose that there were an actual interest rate in the economy.


[User] Please transcribe this text

[Assistant] The bond that was 777, uh, 107, if the actual interest rate was, say, 6%,


[User] Please transcribe this text

[Assistant] Okay, the price of the bond would be more than a hundred.


[User] Please transcribe this text

[Assistant] So some price, which will be the present value, will be greater than 100, obviously, because it's paying


[User] Please transcribe this text

[Assistant] If the interest rate is only 6%, this is giving you more than 100. Now the current yield


[User] Please transcribe this text

[Assistant] Suppose somebody tells you there's a market price for the bond.


[User] Please transcribe this text

[Assistant] Okay, which we know is the present value at the interest rate of 6%.


[User] Please transcribe this text

[Assistant] And he tells you that, look, look at the market value I got last year for these, the yield I got, the current yield I got on these bonds. The present value was, you know, some number bigger than 100, but I take 7 over the present value and I get something bigger than 6%. At your bank you're only getting 6%.


[User] Please transcribe this text

[Assistant] Okay, now, this bond is called a premium bond.


[User] Please transcribe this text

[Assistant] Just because a bond pays a coupon of 7, it may be when the bond was issued, everybody thought the interest rate was going to be 7% forever. So that's why they picked a coupon of 7, and that's, so that the price when they first issued it would be equal to its face value. But you know,


[User] Please transcribe this text

[Assistant] Maybe the next day, so it's still a 10 year bond, practically no time has changed, but unexpectedly the interest rates fell to 6%. If you take the same coupon bond paying 7 all the time at 6% interest,


[User] Please transcribe this text

[Assistant] Okay, so you're going to have to pay more for the bond because the interest, you know, the present value is higher. However, people


[User] Please transcribe this text

[Assistant] This is what we bought the bonds for, you know, I'm a fund, I went out and bought these bonds.


[User] Please transcribe this text

[Assistant] For present value, you know, and I now look at the price I paid and I got seven dollars for these bonds, you know, this year in income and seven over the market price of the bond is bigger than six percent. So I was doing a great job. You should invest in my fund.


[User] Please transcribe this text

[Assistant] Okay, so that can't be a correct thing to say or persuasive thing to say because the market price reflected the fact that the interest rates were 6%. Everybody was properly computing the present value and let's say the market price was equal to the present value. Present value would indeed be greater than 100 and in fact,


[User] Please transcribe this text

[Assistant] The market price would be, the current yield would be more than the interest rate of 6%. So why is that?


[User] Please transcribe this text

[Assistant] Is always greater, greater than the interest, than the interest rate.


[User] Please transcribe this text

[Assistant] Okay, so 777, 107, there's only a 6% interest, so everybody taught by Irving Fisher computes the new present value, which of course is bigger than 100.


[User] Please transcribe this text

[Assistant] And that's the market price. Someone scrupulous salesman, uh, starts a fund.


[User] Please transcribe this text

[Assistant] Buy the bond for whatever this present value of the market price is.


[User] Please transcribe this text

[Assistant] Then goes out to a bunch of clients, potential clients, investors and says,


[User] Please transcribe this text

[Assistant] Look, my very first year in business, I spent, you know, a little more than a hundred dollars, and I got seven dollars as a coupon, and seven over this, you know, little more than a hundred is giving me, obviously, a current, you know, is giving me a current yield that's more than six percent. I beat the interest rate, you should invest in me, and by the way, I'll charge you a little fee to do that because I'm doing so great.


[User] Please transcribe this text

[Assistant] Now, that's always gonna be the case, so it has to be that he really hasn't accomplished anything at all. So why is it easy to see that whenever I computed the present value, it was gonna have to be more than, this current yield would always be more than 6%. How do I know that?


[User] Please transcribe this text

[Assistant] Okay, and the interest rate went down to 5%. Okay, now.


[User] Please transcribe this text

[Assistant] What's going to be the present value of this bond?


[User] Please transcribe this text

[Assistant] It's not going to be 200, right? If, if, if the bond paid 10, 10, uh,


[User] Please transcribe this text

[Assistant] 10, 10, 10, and 110, and the coupon is 5%. What is the present value of this, I claim? Present value is going to be less than 200.


[User] Please transcribe this text

[Assistant] The coupon is always double the interest rate. Okay, so it looks like, you know, that's what you'd get if you had $200, but at the end, if you're saying you're only gonna get $110 and not $210. So this present value of this thing has to be less than $200. Okay, so if you double the coupon,


[User] Please transcribe this text

[Assistant] If you, if you have the interest rate, the interest rate was originally 10% here. If you cut the interest rate in half to 5%, it looks like your annual coupon is double the interest rate. But at the end, you don't get a principal


[User] Please transcribe this text

[Assistant] That's double the original principle. All you did was double, you know, relative to the interest rate of 5%. The coupon's twice as big as you'd normally expect, but the face isn't. So therefore this has to be worth less than 200.


[User] Please transcribe this text

[Assistant] If it were, uh, you know, 200 at 5% would give you 10, 10, 10, 10, 10, 210. Okay, but this gives you 10, 10, 10, 110. So obviously the presence value is less than, less than 200. But therefore 10 over something less than 200 is gonna be more than 5%. Okay, so that's his intuitive proof, which is


[User] Please transcribe this text

[Assistant] The essence of the thing that if ever you have a coupon bond whose, that's a premium bond, then the current yield is always above the, uh, current yield is always above the interest rate. So you can always advertise it as having a spectacular


[User] Please transcribe this text

[Assistant] Uhm, current yield when in fact it's just priced perfectly fairly.


[User] Please transcribe this text

[Assistant] Okay, so I'm going to just continue the story of what's the right way to measure things and how you can get confused by measuring the wrong way next class.


[User] Please transcribe this text

[Assistant] I like to eat pizza, but what kind of foods do dinosaurs like to eat?


[User] Please transcribe this text

[Assistant] Yeah, it's pretty old. Something like 65 million years, give or take. Triceratops make the best hat racks. How demeaning. Well, when they hold still at least.


[User] Please transcribe this text

[Assistant] I think I like her answer better.


[User] Please transcribe this text

[Assistant] C12 by concentrating on this number.


[User] Please transcribe this text

[Assistant] In this section, we'll focus on tasks to evaluate inputs, which can be important for ensuring the quality and safety of the system.


[User] Please transcribe this text

[Assistant] For tasks in which lots of independent sets of instructions are needed to handle different cases, it can be beneficial to first classify the type of query and then use that classification to determine which instructions to use. This can be achieved by defining fixed categories and hard coding instructions that are relevant for handling tasks in a given category.


[User] Please transcribe this text

[Assistant] For instance, when building a customer service assistant, it might be important to first classify the type of query and then determine which instructions to use based on that classification.


[User] Please transcribe this text

[Assistant] So here we have our system message, which is the instruction for the overall system, and we're using this delimiter.


[User] Please transcribe this text

[Assistant] And the delimiter is just a way to separate different parts of an instruction or output and it helps the model kind of determine the different sections. And so for this example, we'll use the delimiter for hashtags. And this is a nice delimiter because it's actually represented as one token.


[User] Please transcribe this text

[Assistant] Classify each query into a primary category and a secondary category.


[User] Please transcribe this text

[Assistant] We have our primary categories listed here. So billing, technical support, account management or general inquiry.


[User] Please transcribe this text

[Assistant] And then we'll just format this into a messages list with the system message and the user message delimited with these hashtags.


[User] Please transcribe this text

[Assistant] And let's just take a look and see what we think this might be. So I want you to delete my profile. This kind of looks like account management, maybe close account. So let's see what the model thinks.


[User] Please transcribe this text

[Assistant] Great, so the ca- classification from the model is account management as the primary category and then closed account as a secondary.


[User] Please transcribe this text

[Assistant] And the nice thing about asking for a structured output like a JSON is that you can then read this easily into some kind of object. So a dictionary, for example, in Python or something else if you're using a different language. And then you can use this as the input to a subsequent step.


[User] Please transcribe this text

[Assistant] So here's another user message, tell me more about your flat screen TVs. And we just have the same messages list, response from the model, and then we'll just print it. And here we have our second categorization, which seems correct.


[User] Please transcribe this text

[Assistant] We can now provide a set of more specific instructions to handle the next steps. In this case we might add kind of additional information about the TVs, versus in this case we might want to give a link to closing the account or something like that.


[User] Please transcribe this text

[Assistant] We'll learn more about different ways to process inputs in a later video.


[User] Please transcribe this text

[Assistant] And in the next video, we'll look at more ways to evaluate inputs and specifically ways to ensure that your users are using the system in a responsible way.


[User] Please transcribe this text

[Assistant] One of the first things you will see is Big Ben, the famous clock


[User] Please transcribe this text

[Assistant] Which can be heard all over the world on the BBC.


[User] Please transcribe this text

[Assistant] If the Houses of Parliament had not been burned down in 1834, the Great Clock would never have been erected.


[User] Please transcribe this text

[Assistant] Big Ben takes its name from Sir Benjamin Hall, who was responsible for the making of the clock when the new Houses of Parliament were being built. It is not only of immense size, but is extremely accurate as well.


[User] Please transcribe this text

[Assistant] Officials from Greenwich Observatory have the clock checked twice a day.


[User] Please transcribe this text

[Assistant] On the BBC you can hear the clock when it is actually striking because microphones are connected to the clock tower. Big Ben has rarely gone wrong. Once, however, it failed to give the correct time. A painter who had been working on the tower


[User] Please transcribe this text

[Assistant] Hung a pot of paint on one of the hands, and slowed it down.


[User] Please transcribe this text

[Assistant] Yeah, I'm circle. Wait, wait, wait, yeah. You're, I'm circle and you're square. No, uhm, you're square. And then you're circle, yeah. Wait, no, no, no, uhm.


[User] Please transcribe this text

[Assistant] No, this, uh, I think it's, uh, I'm, I'm square and you are, uh, circle. No, wait, uh, you know what? I don't know.


[User] Please transcribe this text

[Assistant] Other than convolutional layers, confidence often also use pooling layers to reduce the size of the representation, the speed of computation, as well as make some of the features it detects a bit more robust. Let's take a look.


[User] Please transcribe this text

[Assistant] Let's go through an example of pooling and then we'll talk about why you might want to do this. Suppose you have a 4x4 input.


[User] Please transcribe this text

[Assistant] And you want to apply a type of pooling called max pooling.


[User] Please transcribe this text

[Assistant] And the output of this particular implementation of max polling will be a 2x2 output. And the way you do that is quite simple. Take your 4x4 input and break it into different regions, and I'm going to color the four regions as follows. And then in the output, which is 2x2,


[User] Please transcribe this text

[Assistant] Each of the outputs will just be the max from the correspondingly shaded region.


[User] Please transcribe this text

[Assistant] So the upper left, I guess the max of these four numbers is nine.


[User] Please transcribe this text

[Assistant] Uhm, upper right, the max of the blue numbers is 2, lower left, the biggest number is 6, and lower right, the biggest number is 3.


[User] Please transcribe this text

[Assistant] So to compute each of the numbers on the right, we took the max over a 2 by 2 region. So uhm, this is as if you're applying a filter size of 2.


[User] Please transcribe this text

[Assistant] Because you're taking a two by two regions and you're taking a stride of two. So these are actually the hyperparameters.


[User] Please transcribe this text

[Assistant] From this filter size, it's like a 2x2 region that gives you the 9. And then you step it over 2 steps to look at this region to give you the 2.


[User] Please transcribe this text

[Assistant] And then for the next row you step it down two steps to give it a six and then step it to the right by two steps to give it a three.


[User] Please transcribe this text

[Assistant] So because the squares are two by two, f is equal to two, and because you, you know, stride by two, s is equal to two.


[User] Please transcribe this text

[Assistant] So here's the intuition behind what max pooling is doing. If you think of this 4x4 input as some set of features, you know, maybe not


[User] Please transcribe this text

[Assistant] If you think of this 4x4 region as some set of features, uhm,


[User] Please transcribe this text

[Assistant] What's there if you're trying to detect the cat? But you know, clearly that feature exists in the upper left hand quadrant. Whereas this feature, maybe doesn't.


[User] Please transcribe this text

[Assistant] Cat eye detector, whereas this feature doesn't really exist in the upper right hand quadrant. So what the max operation does is so long as the feature is detected anywhere in one of these quadrants, it then remains preserved in the output of max pooling.


[User] Please transcribe this text

[Assistant] So what the max operator does is really say, you know, if this feature is detected anywhere in this filter, then keep a high number. But if this feature is not detected, so maybe if this feature doesn't exist in the upper right hand portion, then the max of all those numbers is still itself.


[User] Please transcribe this text

[Assistant] Quite small. So maybe that's the intuition behind max pooling.


[User] Please transcribe this text

[Assistant] But I have to admit, I think, uh, the main reason people use max pooling is because it's been found in a lot of experiments to work well, and the intuition I just described, despite it being often cited, I don't know if anyone fully knows if that's the, uh,


[User] Please transcribe this text

[Assistant] Real underlying reason, uh, I don't know if anyone knows it, that's the real underlying reason that max pooling works well in confidence.


[User] Please transcribe this text

[Assistant] Uhm, one interesting property of Max Cooling is that it has a set of hyperparameters, but it has no parameters to learn.


[User] Please transcribe this text

[Assistant] Right, there's actually nothing for gradient descent to learn. Once you've fixed F and S, it's just a fixed computation and gradient descent doesn't change anything.


[User] Please transcribe this text

[Assistant] Let's go through an example with some different hyperparameters. Here we're going to use, uhm, here you have a


[User] Please transcribe this text

[Assistant] 5x5 input, and we're gonna apply max pooling with a filter size that's 3x3, so f is equal to 3, and let's use a stride of 1.


[User] Please transcribe this text

[Assistant] So in this case, the output size is going to be 3 by 3.


[User] Please transcribe this text

[Assistant] And the formulas we had developed in the previous videos for figuring out the output size for a cons layer, those formulas also work for max pooling. Right, so that uh,


[User] Please transcribe this text

[Assistant] Plus one, that formula also works for figuring out the output size of max pool.


[User] Please transcribe this text

[Assistant] But in this example, let's compute each of the elements of this 3x3 output.


[User] Please transcribe this text

[Assistant] The upper left hand element, we're going to look over that region. So notice this is a 3 by 3 region because the filter size is 3 and tipping max is there. So that's going to be 9.


[User] Please transcribe this text

[Assistant] And I will shift it over by one, because we're taking stride of one.


[User] Please transcribe this text

[Assistant] So that, uh, maxed in the blue boxes, 9.


[User] Please transcribe this text

[Assistant] Let's ship that over again. Uh, the max of the blue box is 5.


[User] Please transcribe this text

[Assistant] And then, uhm, let's go on to the next row. Let's try the one, so we're just stepping down by one step. So, max in that region is nine, max in that region is nine, max in that region... Oh, there are two fives, but the max is a five. Uhm, and then finally, max in that is eight, max in that is six, and max in that is nine.


[User] Please transcribe this text

[Assistant] Okay, so this, with this set of hyperparameters, f equals 3, s equals 1, gives that output shown on it.


[User] Please transcribe this text

[Assistant] Then the output will have the same dimension.


[User] Please transcribe this text

[Assistant] So for example, if you have 5 by 5 by 2, then the alpha would be 3 by 3 by 2.


[User] Please transcribe this text

[Assistant] And the way you compute max pooling is you perform the computation we just described on each of the channels independently.


[User] Please transcribe this text

[Assistant] So, you know, the first channel, which is shown here on top, is still the same. And then for the second channel, I guess this one that I just drew at the bottom, uh, you would do the same computation on that slice of this volume. And that gives you, you know, this second slice.


[User] Please transcribe this text

[Assistant] And more generally, if this was 5 by 5 by some number of channels, the output would be 3 by 3 by that same number of channels.


[User] Please transcribe this text

[Assistant] And the max pooling computation is done independently on each of these NC channels.


[User] Please transcribe this text

[Assistant] So that's max pooling. Uhm, there's one other type of pooling that isn't used very often, but I'll mention briefly, which is average pooling. So that's pretty much what you'd expect, which is, uh,


[User] Please transcribe this text

[Assistant] Instead of taking the maxes within each filter, you take the average.


[User] Please transcribe this text

[Assistant] And so this is average pooling with hyperparameters f equals 2.


[User] Please transcribe this text

[Assistant] S equals 2, you can choose other hyperparameters as well.


[User] Please transcribe this text

[Assistant] So these days, max pooling is used much more often than average pooling, with one exception, which is sometimes


[User] Please transcribe this text

[Assistant] Very deep in the neural network, you might use average pooling to collapse your representation from, say, 7 by 7 by, uh, 1000.


[User] Please transcribe this text

[Assistant] An average over all the spatial extents to get one by one by one thousand. Uhm, we'll see an example of this later.


[User] Please transcribe this text

[Assistant] But you see max pooling used much more in the neural network than, uh, average pooling. So, just to summarize,


[User] Please transcribe this text

[Assistant] The hyperparameters for pooling are f, the filter size, and s, the stride. And maybe common choices of parameters might be f equals 2, s equals 2. This is used quite often and this has the effect of roughly shrinking the height and width by a factor of about 2.


[User] Please transcribe this text

[Assistant] And the common choice of hyper parameters might be f equals 2.


[User] Please transcribe this text

[Assistant] S equals 2, and this has the effect of shrinking the height and width of the representation by a factor of 2.


[User] Please transcribe this text

[Assistant] I've also seen F equals 3, S equals 2 used.


[User] Please transcribe this text

[Assistant] And then the other hyperparameter is just like a binary bit that says are you using max pooling or are you using average pooling.


[User] Please transcribe this text

[Assistant] If you want you can add an extra hyperparameter.


[User] Please transcribe this text

[Assistant] For the padding, although this is very, very rarely used, when you do max pooling, usually you do not use any padding. Although there is one exception that we'll see next week as well, but for the most part, max pooling usually does not use any padding. So the most common value of p, uhm, by far is p equals zero.


[User] Please transcribe this text

[Assistant] So the number of input channels is equal to the number of output channels because pooling applies to each of your channels independently.


[User] Please transcribe this text

[Assistant] One thing to note about pooling is that there are no parameters to learn. Right, so when we


[User] Please transcribe this text

[Assistant] When you implement backprop, you find that there are no parameters that backprop will adapt through maxpooling. Instead, there are just these hyperparameters that you set once, maybe set once by hand or set using cross-validation, and then beyond that, you know, you're done. It's just a fixed function.


[User] Please transcribe this text

[Assistant] The neural network computes in one of the layers and there is actually nothing to learn. It's just a fixed function.


[User] Please transcribe this text

[Assistant] So that's it for pooling. You now know how to build convolutional layers and pooling layers. In the next video, let's see a more complex example of a confnet, one that will also allow us to introduce fully connected layers.


[User] Please transcribe this text

[Assistant] Okay, today we're going to talk a little bit more about Social Security. Social Security remembers the biggest


[User] Please transcribe this text

[Assistant] Uh, program the government runs, this annual


[User] Please transcribe this text

[Assistant] Expenditures are slightly bigger than the military expenditures every year and those two things are way bigger than everything else.


[User] Please transcribe this text

[Assistant] It's been the biggest program the government's run since


[User] Please transcribe this text

[Assistant] Uh, the New Deal, Franklin Delano Roosevelt put it into effect in the late 1930s. Uh, and it seems to be broke.


[User] Please transcribe this text

[Assistant] So it lasted for 70 years and now it seems on the verge of going broke. So what happened and how can we fix it?


[User] Please transcribe this text

[Assistant] And as I said, this has been a topic of conversation, presidential conversation, at least since 2000. There were a bunch of commissions before that looking at the problem and the


[User] Please transcribe this text

[Assistant] What I said last time was the general public and our politicians seem completely confused about what's going on. So we need to figure out how could it be that the program went broke. Was that a, should that have been a surprise and how can we fix it? And the three standard things everybody says is President Bush and many people like him say


[User] Please transcribe this text

[Assistant] Well, the system's going broke. The rate of return young people like you are gonna get is, you know, less than 2% a year. That's terrible. Any bond, any stock, you can expect a much higher return than that. So the program's just awful. Uh, we should stop it or privatize it.


[User] Please transcribe this text

[Assistant] I'll explain what privatizing means, in that way your money instead of going to old people will be put in the stock market and you'll get a higher rate of return and you'll do much better.


[User] Please transcribe this text

[Assistant] And then a second thing people say is, well, the thing lasted all this time. I mean, what's really gone different? What could possibly have caused the change? It must be those dastardly, uh, baby booms.


[User] Please transcribe this text

[Assistant] Generation-ers, uh, like me, who are headed towards retirement in another 20 or 30 years, and they're gonna bankrupt the system. There are gonna be so many of those old geezers hanging around, needing to get paid, that young people like you won't be able to carry the burden.


[User] Please transcribe this text

[Assistant] And so it's our fault. And then there are the people, the naysayers, uh, Gore, uh, chief among them, but many others.


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[Assistant] Obama now, similarly saying, slightly similar thing, saying, well privatization doesn't make any sense, it's logically impossible, because if you take the, the taxes that the young people are paying,


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[Assistant] And tell them those social security taxes they can invest in private accounts, the stock market with their own name on it.


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[Assistant] So those are the three most standard things people say. All three of them have some truth to them but on the whole are substantially wrong, completely wrong, and once we clarify what


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[Assistant] Advances made by FDR and I just thought I'd play the tape of him signing it into law.


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[Assistant] And behind him is the Secretary of Labor, Francis Perkins.


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[Assistant] In my generation, there are many women named Francis, uh, because they were, their parents named them after her.


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[Assistant] Okay, well it was regarded as historic for all time.


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[Assistant] And, uh, let me now explain what Social Security does and what the rules are. And, uhm, I have to open another file.


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[Assistant] Alright, so after passing legislation, a massive publicity campaign was launched, convincing people that this was a good idea.


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[Assistant] And not everybody thought it was such a good idea, by the way. And so, uhm, you know, this is an example of the advertisements that were plastered everybody, you know, telling you about how much you were going to get money after you retired.


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[Assistant] Now what was the idea of the, uh, of Social Security? The idea was that lots of people


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[Assistant] When they were young, didn't really have the foresight to imagine what life was going to be like when they were old. In fact, in the late 1930s, the most destitute of Americans were the old.


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[Assistant] And, and so the idea was to force them to save when they were young and then the money would be there, uh, would be invested in U.S. Treasury bonds and accumulate interest and the money would be there when they got old. So it was, uh, it was imagined to be a pre-funded system. Pre-funded meaning the money comes in,


[User] Please transcribe this text

[Assistant] Uh, and it's that money which is gonna then pay people later when they get to old age.


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[Assistant] The average person, recipient, retiree would be receiving 40% of the average wage of the average young worker.


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[Assistant] And you know, the idea is that when you're older, you have less expenses, you probably already own your house, your children are out of the house.


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[Assistant] Uhm, so 40% should be enough to keep, uh,


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[Assistant] You know, to keep you going was certainly more than the average old person had at the time.


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[Assistant] Well, there's a side part of the program, which he mentioned, which is ensuring people, you know, who, uh, of disabilities, things like that. But that's a, that's a one out of the 12.4% tax, it's something like 1.8%.


[User] Please transcribe this text

[Assistant] But the main part of the program is insurance against what? Yes.


[User] Please transcribe this text

[Assistant] Uh, and the second year they were paying more taxes, and of course they were still not retired yet, so they weren't actually giving out the money to anybody, and this, uh, fund was starting to accumulate. So Francis Perkins said,


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[Assistant] Well, what are we doing here? The whole point is that we've got all these old people, you know, it's just the Depression, we haven't come out of the Depression yet, World War II hasn't started, it won't for the U.S. start for a few more years by the way.


[User] Please transcribe this text

[Assistant] So there are all these old people sitting here, totally destitute.


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[Assistant] And, uh, we've got all this money also just sitting here. It really doesn't, uh, make sense, she said. What we ought to do is take the money the young people are paying in and give it to the old people who are already there.


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[Assistant] Uhm, that way we're gonna be saving these old people and the young people, when they get old, they'll be saved themselves because there'll be more young people coming along afterwards who can pay taxes in when they're young and today's young, when they're old, will then collect those taxes and they'll be reimbursed for what they contributed when they were young.


[User] Please transcribe this text

[Assistant] Well, so Roosevelt, uh, resisted for a while. Francis Perkins was apparently an incredibly persuasive person.


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[Assistant] Uhm, one person at the time named Witt, uh, who was on the Social Security Commission, uhm, tried to tell if that was going to lead to budget problems. She said that he was a half Witt and that he...


[User] Please transcribe this text

[Assistant] You know, we had a more urgent problem. Not that she doubted him, but the problem was more urgent. And so that was the only way to solve the problem, the current crisis.


[User] Please transcribe this text

[Assistant] So they finally agreed to, to move the system from a pre-funded system to a pay as you go system. So the money coming in from current workers is used to pay directly to the old workers.


[User] Please transcribe this text

[Assistant] So then, as I want to get into all these, uh, little variations that got made.


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[Assistant] Okay, so the program is called the Old Age Survivors and Disability Insurance Plan. Insurance is mainly for living too long.


[User] Please transcribe this text

[Assistant] But also in case you get disabled or in case you, you know, you have children and you're disabled, you die, they get something. Okay, so it's a combination of insurance, disability, but the main insurance is for living, uh, a long time. So as I said, the tax now is 12.4%.


[User] Please transcribe this text

[Assistant] So, if you make more than $106,800, you pay


[User] Please transcribe this text

[Assistant] You know, 13,000 or something and then nothing more on social security.


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[Assistant] Okay, so the social security tax stopped at 106,800. You know, the income tax, you know, I'm losing track of what it is.


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[Assistant] Uhm, and whether we're gonna go back to the old one, but let's say it was 38%, 39%, something like that.


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[Assistant] If you had to pay that income tax and on top of it pay social security tax of 12.4%, you'd be over 50% tax.


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[Assistant] So needless to say, some of the people who think we can solve our social security problem by eliminating the cap would be imposing a gigantic marginal tax rate on a lot of people who don't have a marginal tax rate. So uhm,


[User] Please transcribe this text

[Assistant] So 94% of workers are below the cap anyway. So we're talking about the top 6%, most of which you'll, you know, you'll be in that top 6%.


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[Assistant] You won't have to pay on the margin, uh, social security tax.


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[Assistant] So there's the taxes, 12.4%, and then there's the benefits. Now how, how do the benefits work? How are they determined?


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[Assistant] Uh, so the tax, as I said, you just take your income below $106,000 and you pay 12.4% tax. So, how do the benefits work? This is a little bit, uh, complicated, but it's actually a very interesting plan. What they do is they look


[User] Please transcribe this text

[Assistant] at every year what the fraction of your wage was relative to the economy-wide average.


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[Assistant] So it's your relative earnings. So when you're young, it's probably going to be .8, .9.


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[Assistant] If you go to Yale, it's probably going to be 1.5, 2, you know, soon thereafter.


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[Assistant] Okay, and it might get even higher, but anyway, so that's the relative earning you have every year.


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[Assistant] So then they say, let's average your 35 best relative earning years.


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[Assistant] And, and just divide, you know, take the sum, divide by 35. So what is your average lifetime, uh, relative wage? You know, for the average person, it's gonna be 1.


[User] Please transcribe this text

[Assistant] For some people it might be .8, for some people it might be 2 or 3 or 10.


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[Assistant] Okay, now, the first, so, alright, so you've got your average relative lifetime wage. What do you make when you retire? Well, when you hit an age, which, you know, they're adjusting now, but it used to be 65. When you hit 65,


[User] Please transcribe this text

[Assistant] When you hit 65, you're going to be paid a fraction of the average wage in the economy when you're 65.


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[Assistant] Well that depends on what your historical average wage was. So let's just see what the, uh, function is.


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[Assistant] Was one equal to the average wage of the economy, your entire...


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[Assistant] Your relative wage historically was 10% of the average wage in the economy. You would get 9% of the average wage at the time you retire.


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[Assistant] So you can see that this is what's called a concave function, just like our utility function is diminishing marginal returns. So it means that if you're earning


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[Assistant] You know, the ratio of relative wage historically to what you get of the young people's wage is going to be 0.9, then the slope drops to 0.32, then it drops to 0.15, and after your double, actually I think 1.99, after your double the, uh, average


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[Assistant] If your historical average wage was more than twice the average wage in the whole economy, doesn't do you any good. Might as well have been twice. If it's four times, ten times, you don't get any increase. Okay, so you can see why it makes some sense to have a cap to the taxation, because people who are making


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[Assistant] Ten times the average wage, you know, let's say their average, they're making a million dollars nowadays.


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[Assistant] You know, they aren't gonna, they aren't gonna see any benefit from having contributed so much to Social Security. Their benefits would be just the same as if they only made $200,000 a year. So if you, if you, if you pass, you know, so, okay, so,


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[Assistant] Anyway, so you see that there's a connection between how much you made when you were young, how much you get paid when you're old, but the connection is a concave thing, so it redistributes income.


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[Assistant] People who had very low average wages when they were working get a better deal from Social Security than people who had high relative wages while they were working.


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[Assistant] A cornerstone of the idea it's meant to help protect, uh, the people who are very poor.


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[Assistant] Uhm, and so it doesn't pay everybody equally, it's still, you get, you know, you get, uh,


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[Assistant] After the first year you retire, so when you're 65, you're getting 40%.


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[Assistant] Your way, your Social Security benefit is indexed to inflation.


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[Assistant] So it grows at the rate of inflation. The wage is probably growing faster than the rate of inflation. So as you get to be 75, 80, and 85, your average, uh, benefit, your benefit


[User] Please transcribe this text

[Assistant] Is, you know, down to 36% of the...


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[Assistant] Average wage of the workers when you're 85.


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[Assistant] But it starts off at 44%, assuming you were averaged your whole life.


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[Assistant] Uh, it will be 44% and gradually decline if wages grow faster than, uh, prices. Okay?


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[Assistant] Insuring you against living long because the benefit carries on forever. It's insuring you against inflation because it's inflation corrected.


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[Assistant] It's in a way insuring you against, uh, you know, feeling like a loser because you're always gonna get a, you know, start off with a fraction of the new.


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[Assistant] Average wage. So if your children, you know, if the whole country grows incredibly fast and your children are incredibly, uh,


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[Assistant] That's the idea of the system. Are there any questions about how this mechanically works?


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[Assistant] Okay, now, it's very hard to do this in the market, by the way. If you wanted to, if you, uh, for example, now think to yourself,


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[Assistant] An annuity in the private market that's going to tell you that, you know, when you hit 65, it'll continue paying you for the rest of your life. You can actually find them, but they're an incredibly bad deal.


[User] Please transcribe this text

[Assistant] Okay, and the reason that they're bad deals is that, uhm, the people


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[Assistant] Social Security is doing something that is very hard to obtain in the market. Okay, now uhm,


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[Assistant] Oh, I should say a couple other things about it, some other interesting things. You can choose to retire early if you want.


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[Assistant] So if you retire before 65 and you want to get your payments starting earlier,


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[Assistant] They say, okay, you can do that, but we're gonna cut the payments every year, and they make some actuarial calculations so that it's fair, you know, based on how long the average person lives. So if you start at 63, you get two extra years, but they know if you live the average amount of time,


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[Assistant] You know, how much to cut it down so that on average you'll get the same amount as if you did the normal thing retiring at 65. They've actually raised this age to 67.


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[Assistant] Okay, now another thing is to the, uh, spousal benefit. This is actually quite amusing, I think.


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[Assistant] So I had a secretary 20 years ago who, uhm,


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[Assistant] Got married three times, and so she consulted me about this. So if you're a spouse...


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[Assistant] Uh, you know, traditionally, one of the spouses wouldn't work, typically the woman, and so the, the wife would


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[Assistant] Then you can either take your own social security benefits or if they're bigger, you can take 50% of your spouses. And if you've been married to several different guys,


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[Assistant] She tracked down her first husband. She hadn't talked to him in 30 years. Anyway, so.


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[Assistant] Okay, so let's give you an idea of the size. This was in 2005. Okay, so, you know, 157 million workers are paying into it. There are 48 million beneficiaries and, uh, okay, so, you know, it's a gigantic program. So imagine the cost of keeping track


[User] Please transcribe this text

[Assistant] Get the taxes, you have to make sure people are paying the right amount. It's a, it's a, it's a huge thing involving, you know, basically the entire population. You know, a couple hundred million people almost.


[User] Please transcribe this text

[Assistant] How much does it cost? How much money do they waste running the whole thing? Less than 1% of the, of the benefit.


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[Assistant] Okay, so it's one of the most efficiently run, uh,


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[Assistant] Programs, maybe the most efficiently run program government has ever devised.


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[Assistant] So, it isn't that the thing is going broke, as you might...


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[Assistant] Believe listening to George Bush because somehow they're pissing away the money and just losing it.


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[Assistant] It's, that's not the reason. Something else was happening, because they don't waste much money, uh, running the program.


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[Assistant] Okay, so this just gives you an idea just of the size of it. So this is 2005. You have to add, you know, 20% or something or 15%. So the benefits, the contributions, 593 billion.


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[Assistant] Remember, there's a tax rule of 12.4%, then you have to pay out the benefits, which is some other rule, depending on what you earned in the past.


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[Assistant] So there's no connection between the two, and in fact the contributions are bigger than the benefits. So the trust fund was growing. And you know, look at the administrative expenses. Tiny, and there are some, you know,


[User] Please transcribe this text

[Assistant] The railroad, when the law was first passed, railroads were in trouble and so, you know, in order to get some senator to vote for it, they had to hand money over to the railroad. So anyway, something's going on with the railroad. But the other, the other, the other benefit is, uh,


[User] Please transcribe this text

[Assistant] The trust fund, you know, makes returns, because it's a two trillion dollar trust fund. It was a little smaller than that in 2005, so it's earning interest. That's part of the extra returns. You see why the surplus is quite big now, but it's headed to be quite small.


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[Assistant] Okay, so now what is the argument about? What is the crisis of social security?


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[Assistant] Uh, what do the Democrats and the Republicans say? Well, you've just heard what the program is. You know, how attractive do you think it is? And do you really think it's such a good program?


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[Assistant] The main thing is it's going broke. Okay, so now why is it going broke? It's not broke now, it's making more money than it's paying out.


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[Assistant] But in the future, it's very obvious that, you know, you can just look at the demography, it's very obvious that it's going to


[User] Please transcribe this text

[Assistant] The benefit formula is going to be so big and there are going to be so many people retired that the payments you make to the old, when I'm retired, are going to be way bigger than the payments that the young are making in taxes, provided the rules stay the same.


[User] Please transcribe this text

[Assistant] So, that's the main problem. Somehow the system got out of whack.


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[Assistant] And we have to figure out, uh, how to put it back together. Now it's no surprise in one sense that there's an imbalance because there's nothing about the rules that balanced it.


[User] Please transcribe this text

[Assistant] I mean, the taxes you pay, we'll look at this a second, you know, that's just some formula, 12.4%.


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[Assistant] What's that got to do with the benefits you're paying? Well the benefits are...


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[Assistant] You know, 40% on average of what new, young people are making. So basically, somehow the system must have assumed that there'd be three young people for every old person. So the young people paying 12% each, the old guy getting 40%,


[User] Please transcribe this text

[Assistant] You know, 3 times 12 is, you know, 12.4. It's close to 40%.


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[Assistant] But if that ratio is very different from that, the system, for example, two young people for every old person, the system's gonna be way out of balance.


[User] Please transcribe this text

[Assistant] And the formula has nothing to do with how many children people are having or anything like that. So it's not so surprising it's gotten out of balance.


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[Assistant] But we're gonna see there's a much more fundamental reason why it's out of balance. Okay, so the first problem is it's not in balance. But, there are many other problems. So why do Democrats like it so much?


[User] Please transcribe this text

[Assistant] Democrats say, oh, it's wonderful, you know, we're helping poor people, we're redistributing things on the basis of lifetime earnings.


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[Assistant] Benefits, if the young are booming along, making huge wages, then the, then the old guys keep up with them, and, uh, and, you know, so there's less, you know, so it's not only insurance, but it's kind of less jealousy and less disparity in the population.


[User] Please transcribe this text

[Assistant] And then, uh, you're protected against long life, you're protected against, uhm, inflation.


[User] Please transcribe this text

[Assistant] And you can't blunder away your money because you have no choice about where your investment goes. The government's taking care of it. So if you're a bad investor, you can't suddenly find that you've lost all your money. So now, what do Republicans say? Republicans, uh, uhm, and, and, surprisingly, I'm going to


[User] Please transcribe this text

[Assistant] You'll be surprised where I come out on this, I think. So the Republicans say, you know,


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[Assistant] This stuff is much less good than it sounds at first glance.


[User] Please transcribe this text

[Assistant] There are no property rights. I mean, who's to say what I'm gonna get when I'm old? I mean, nobody even knows what they're gonna get when they're old.


[User] Please transcribe this text

[Assistant] I defy you, a Republican would say, to tell me exactly what your benefits are gonna be, or even to explain to me how they're calculated. Virtually nobody in the population can do that. That's just not right. That, uh, and you have no control of them. So what's gonna happen, a Republican would say, one of these days the Democrats are gonna say, oh, the system's broke.


[User] Please transcribe this text

[Assistant] We can't afford to pay everything, so we're going to cut all the benefits in half or something.


[User] Please transcribe this text

[Assistant] So a Republican would say, you know, they're not even my benefit. In order for me to really feel good about participating in Social Security, I want to know that when I put the money in, what I'm getting out, and I want to own it. I don't want it to be some vague promise that can be taken away from me, and probably will be taken away from me.


[User] Please transcribe this text

[Assistant] Uh, then another thing is even if you did know this formula that I just explained,


[User] Please transcribe this text

[Assistant] You know, people who want to retire and want to figure out how to plan for their retirement, what does a normal person do? He says, how much money have I got in the bank? You know, I've saved on my work, I've got $100,000 in the bank, please tell me what the value today is of my future Social Security benefits. If those are, you know, $8,000.


[User] Please transcribe this text

[Assistant] So, and I know, you know, how much of my, how much money today is, how big my savings are relative to what the market values of my social security benefits.


[User] Please transcribe this text

[Assistant] So the Republicans say, you know, people just don't have any idea what the value of their benefits are. Even if they happen to know the formula I just explained, nobody really can calculate what it is.


[User] Please transcribe this text

[Assistant] Can you tell me how much, you know, what's the effective tax rate? Let's say I'm in the top tax bracket. What is my effective tax rate on Social Security? I mean, what fraction of my taxes are being taken away from me?


[User] Please transcribe this text

[Assistant] You know, because my benefits are going to be less good because I was one of the highest earners.


[User] Please transcribe this text

[Assistant] Who can, you know, there's virtually no one in the country who's able to answer that question. A Republican would say, what kind of a program is this? If nobody knows, you know, okay, they'll say, you know, we may sign on to the idea that the rich should give some of their money to the poor, but at least tell us how much of our money we're giving to the poor. We don't even know.


[User] Please transcribe this text

[Assistant] Okay, and then the Republicans say, we'd like, uhm,


[User] Please transcribe this text

[Assistant] Equity like returns, you know, why is it, this is what George Bush said, why is it that our returns are going to be 2%? I'd like to know that my money is being invested in the stock market and earning a really, you know, what I can get in the stock market. I mean, I'm, you know,


[User] Please transcribe this text

[Assistant] Anyway, uh, Republicans are, you know, everybody, you know, they're savvy investors like to think that the money that they're being forced to save can get the same rate of return as they get in the, uh, they could get for themselves. Why should they be cheated in their government? Nevermind that they have to give away part of the money, the part that they're not giving away, at least, auto-earn equity returns. And then there's the, uh,


[User] Please transcribe this text

[Assistant] Republicans tend to think that choice is a good thing, not a bad thing, and so if you let people decide how to invest, it'll be better, uh, you know, be better for them than if you, uh, even if some of the people make mistakes.


[User] Please transcribe this text

[Assistant] Yes, but no, I don't think so because...


[User] Please transcribe this text

[Assistant] Uhm, so his question is, since we don't know how long we're going to live, how can you pro- and the program continues to insure you for your entire life and pay you for your entire life, how can you figure out what the market value of that is?


[User] Please transcribe this text

[Assistant] Well, the fact is, there is no general market you can look, so you're right, there is no general market you can look at now, today, that will tell you


[User] Please transcribe this text

[Assistant] Suppose we pay a fixed amount of money for the average person in the economy, what's the present value of that? However, that doesn't mean we couldn't have a market like that.


[User] Please transcribe this text

[Assistant] My solution is going to involve precisely a market like that.


[User] Please transcribe this text

[Assistant] So, uh, it could be, you could, so to answer his question, it's not inherently impossible to attach a market price to paying somebody for the rest of his life.


[User] Please transcribe this text

[Assistant] After all, you could imagine Social Security now paying, you know, let's say 50 million people, the people who are now retired, each of them is going to be paid for the rest of his life according to a rule which we all understand, you know, it just goes up with inflation. So you could say,


[User] Please transcribe this text

[Assistant] Suppose you owned 1% of all those payments.


[User] Please transcribe this text

[Assistant] Every 70 year old today is going to get from Social Security. That's a well defined thing. It could trade in the market. You're going to see that the market, as soon as we start talking about this, there are an incredible number of


[User] Please transcribe this text

[Assistant] Derivative instruments, they're called, that trade in the market, that could be a new one, and uh, then there would be a market price. So you're going, so you're,


[User] Please transcribe this text

[Assistant] The rules of Social Security are whether you think they're bad or good for some other reason. I've tried to list the ones that struck me as the most important. Yeaah.


[User] Please transcribe this text

[Assistant] So if you, uh, you can always do this calculation, which I'm going to, which historically has been done, I'm going to show you those numbers in a second. You can always look at how many taxes, let's take some, let's take, you know, someone my father's age, my father actually died, but you know, a couple years ago my father, he could look back at his whole life and he could look at how much money he paid in social security taxes when he was young.


[User] Please transcribe this text

[Assistant] And then he could look at what benefits he got every year until that point, and let's say it was the day after he died, I could look at what he got every year until he died. So then I could just, you know, that's just a sequence of cash flows. We know how to calculate the internal rate of return of that sequence. That's his rate of return.


[User] Please transcribe this text

[Assistant] Okay, and I showed you in the graph a long time ago that that was actually done. We've done that. Leimer did that.


[User] Please transcribe this text

[Assistant] So Bush is saying, why should you, young Yale undergraduate, why should you be satisfied with less than 2%? If instead of paying those taxes to Social Security, you put them in the stock market, you'd get lots more than 2%, probably. So why, why be satisfied with 2%?


[User] Please transcribe this text

[Assistant] Okay, and Gore would say, well now that we've got this pay as you go system, you can't possibly put it in the stock market because then the old people aren't going to get it.


[User] Please transcribe this text

[Assistant] Any other reasons you think the program is good or bad? Social Security, should we get rid of, you know?


[User] Please transcribe this text

[Assistant] What's your feeling about whether we should get rid of it or not or privatize it or change it?


[User] Please transcribe this text

[Assistant] Other problems with Social Security is that it discriminates.


[User] Please transcribe this text

[Assistant] Uh, it doesn't treat everybody equally, so who were the most, so for, his first example was


[User] Please transcribe this text

[Assistant] Who, who among you can you predict is gonna, are gonna live less long than others among you, at least historically? Presumably that will stay true. Yup. Men.


[User] Please transcribe this text

[Assistant] Okay, so men live six years less long than women, so men are getting a bad deal. Now,


[User] Please transcribe this text

[Assistant] Historically, although this is rapidly changing, but black men lived even less long than, you know, even worse by a considerable degree. So you'd think it discriminated against black men. Uhm, so, uh,


[User] Please transcribe this text

[Assistant] Black men also tended to be poor on average though, so they were getting a better return per year than rich white men. But anyway, that, uh, uh, black men with the same earnings


[User] Please transcribe this text

[Assistant] Got a much worse deal historically on social security than a white man with the same earnings, because on average the black man died before the white man.


[User] Please transcribe this text

[Assistant] I regard those as less critical, though, than the problem of thing going broke, and these things, which have split the country, it's been impossible, so basically everybody thinks this is a logical contradiction. You can't do what the Republicans want, at the same time do what the Democrats want. So, what did you do?


[User] Please transcribe this text

[Assistant] Anything else anyone wants to say? Someone else had their hand up before.


[User] Please transcribe this text

[Assistant] Why did the system become such a mess? How did it go broke? How should we have expected it to go broke?


[User] Please transcribe this text

[Assistant] So, did it all happen because there was the baby boom?


[User] Please transcribe this text

[Assistant] Alright, so I want to tell a little parable. So, that has nothing to do with the baby boom. Okay, so.


[User] Please transcribe this text

[Assistant] Imagine that, uh, and I'm, I'm saying it in terms of fathers and sons, but I could say mothers and daughters, okay? So, historically it was


[User] Please transcribe this text

[Assistant] Men working most of the time, but let's do, let's do mothers and daughters, okay? So suppose a mother, uhm, is old now and sick.


[User] Please transcribe this text

[Assistant] And she has, she needs an incredibly expensive operation. A million dollars to, uh, you know, to save her. Or, you know, to extend her life.


[User] Please transcribe this text

[Assistant] My daughter wouldn't have any life, and her daughter wouldn't have any life, and her granddaughter wouldn't have any life, and you know, my mother's responsible for not just me, but all these generations after me. Why should I be the one to pay the entire benefit of my mother's operation? So you know what I'm gonna do? I'll give her the million dollars.


[User] Please transcribe this text

[Assistant] I sacrificed for your grandmother, my mother. I put up a million dollars to save her. I'm broke now. You know, maybe I don't need an operation, but I'm basically totally broke because I spent so much money rescuing my mother.


[User] Please transcribe this text

[Assistant] You know, why don't you do the same for me that I did for my mother and give me a million dollars?


[User] Please transcribe this text

[Assistant] And by the way, you know, you can use the same argument with your daughter, and so it's really not so bad because you're gonna get the money back when you're old. And so the granddaughter agrees, you know, the granddaughter agrees and pays the daughter, and then when she gets old she does the same thing. It goes on for generation after generation. Now, let's say it went on forever. How did this happen? Have we just, I mean, did the money get


[User] Please transcribe this text

[Assistant] Where did the million dollar operation get financed? How did that happen?


[User] Please transcribe this text

[Assistant] Well you got a million dollars back, remember, when you were old. Okay.


[User] Please transcribe this text

[Assistant] Exactly, so that's the whole point. The point is that the daughter made, the dollar paid, so just to repeat what he said, the dollar, in case you couldn't hear it, the dollar, the first daughter paid a million dollars when she was young. Yes, she got the million dollars back, but when she was old, and that's a long time later, so that whole time she made a zero percent interest. Now maybe the interest rate,


[User] Please transcribe this text

[Assistant] Was, let's say over that many years, you know, uh,


[User] Please transcribe this text

[Assistant] You know, we're talking about 30 years or something, or 40 years, a large amount of time. So the interest rate...


[User] Please transcribe this text

[Assistant] Could easily, you know, if 40 years, you divide 40 into 72, you know, it's like one and three quarters or something. So if the real interest rate was one and three quarters, something like that, you could easily imagine that the, that was the doubling rule, that, you know, $100 could have been turned into $200.


[User] Please transcribe this text

[Assistant] So, the first daughter, who took her $100, could have had $200 by the time she was old, she only got $100 when she was old. So in present value terms, she gave up $100 when she was young, she got, in present value terms, $50 when she was old. So she gave away $50. She paid for half the population, half the...


[User] Please transcribe this text

[Assistant] Operation. Now where did the rest of the fifty dollars come from? Well the granddaughter


[User] Please transcribe this text

[Assistant] Gave a hundred when she was young, got a hundred when she was old, so in present value terms, she also lost fifty dollars, exactly the same amount as the first daughter. She gave up the same thing. Her contribution was just as big. Of course, it came a lot later. So in present value terms, at the time of the operation, the granddaughter's contribution is discounted twice. So it's a half of a half.


[User] Please transcribe this text

[Assistant] So, she only contributed, in present value terms, $25 to the, to the operation. And then the, the great granddaughter, you know, she, she herself looks at it as a $50 contribution, but from the point of view of the original operation, it's discounted three times, so by eight, so it's twelve and a half.


[User] Please transcribe this text

[Assistant] So fifty plus twenty-five plus twelve and a half plus six and a quarter, blah blah blah, forever, adds up to the hundred. So basically, this


[User] Please transcribe this text

[Assistant] This parable shows how a daughter could share the cost of, uh,


[User] Please transcribe this text

[Assistant] Her mother's operation, uh, among all the descendants,


[User] Please transcribe this text

[Assistant] Pay completely for the operation with each generation making the same contribution, the same sacrifice. Of course, the generations who make it earlier are helping the mother more, but the point is every generation has made exactly the same sacrifice and paid for, and that's how the mothers, the original mother's operation got paid for.


[User] Please transcribe this text

[Assistant] Okay, now, what happens in Generation 10? The great-great-great-great-granddaughter is gonna say, you know, I never even heard of this original mother. I couldn't care less about her operation. It wasn't a very good operation anyway, because she died three years later, because medicine was so bad at the time.


[User] Please transcribe this text

[Assistant] So, you know, why should I be paying my contribution to that original mother's operation? Yes, I know that she's responsible for my life, but you know, I don't know anything about her. I don't even know her name anymore. How come I have to keep paying for it? So, I just want to stop. Now, why is it going to be actually difficult for that, that generation to stop?


[User] Please transcribe this text

[Assistant] You know, I just don't want to give my money to that first generation. I couldn't care less. Let's stop right now. Yup.


[User] Please transcribe this text

[Assistant] Exactly. So you can't stop just in the middle because it's, it's like the gift is being reenacted every generation. So the new generation that stops, you know, even if they understand where the whole thing began, they're not going to screw


[User] Please transcribe this text

[Assistant] Okay, so that's what, uh, okay, so to say the parable, uh, very shortly, the first generation that got taxes


[User] Please transcribe this text

[Assistant] Uhm, got benefit without contributing anything, that was a huge amount of money that they got. Every generation after that lost money, but that was all, you know, a way to pay the first generation, and you can't stop the cycle without screwing your own parents. And so it's very difficult for the thing to be stopped. Okay, so, now you could


[User] Please transcribe this text

[Assistant] Make it a little bit more realistic by saying, uh, every people, every generation, uh, the interest rate, you know, there's a growth


[User] Please transcribe this text

[Assistant] You know, wages grow every generation, say between 1 and 2 percent in real terms. That's the historical rate of growth.


[User] Please transcribe this text

[Assistant] By the way, it hasn't been so great lately, but anyway, historically,


[User] Please transcribe this text

[Assistant] So on an annualized basis, if you did the same thing with each generation paying, uhm,


[User] Please transcribe this text

[Assistant] 12% of their youthful wages you would find


[User] Please transcribe this text

[Assistant] That, now we're coming closer to reality, that every generation was going to get


[User] Please transcribe this text

[Assistant] dollars out of a hundred, say, but their daughter, that lady's daughter, you know, thirty years later, the wages would have grown by one to two percent every year for those thirty years. So twelve percent of that bigger number would go to that daughter, and so there would be a rate of return between one and two percent.


[User] Please transcribe this text

[Assistant] And that's exactly what Bush and everybody else is predicting. So now you understand where the 1-2% comes from that, uh, you're, you're going to get. The population is stable, the ratio of young to old, the rate of return on Social Security is going to be equal to the rate of growth of wages.


[User] Please transcribe this text

[Assistant] So it's not zero, as in the first parable, because wages are actually going, it's between one and two percent.


[User] Please transcribe this text

[Assistant] Which is a bad return compared to the rate of interest. And that's why every generation is losing. Okay, so let's, uh, let's do one more thing. So the baby boom. Does the baby boom make things worse or better?


[User] Please transcribe this text

[Assistant] Okay, so how can you think about this? It's so simple minded to think this way. It's amazing. The public is so confused about this.


[User] Please transcribe this text

[Assistant] So, suppose you have a baby boom generation. So you're going on with all these mothers. We're back to the mother and the daughter with, uh, you know, one million.


[User] Please transcribe this text

[Assistant] And so let's say there's one mother, one daughter, you know, one person in every generation. All of a sudden, there's a baby boom generation. But of course, to be old, you have to be young first.


[User] Please transcribe this text

[Assistant] So let's say in some generation, after a bunch of times, there are two daughters instead of one daughter.


[User] Please transcribe this text

[Assistant] Uh, they're each paying, uh, okay, there are two daughters instead of one daughter. So each of them is now going to pay, uhm,


[User] Please transcribe this text

[Assistant] Half of their money goes to paying off the, the, the mother when she's old, just like it would have usually happened. But the baby generation, because, you know, it's young first, that means when I was young, my generation was making a huge amount of money, paying a huge, we're paying, doing it now, that's why there's a surplus.


[User] Please transcribe this text

[Assistant] There's this gigantic surplus being put into social security. And so when my generation gets old, the dollar that didn't have to go to the mother because there was an extra dollar there, that could be earning the rate of interest. And so at the end, when we get old, there are going to be two of us.


[User] Please transcribe this text

[Assistant] I'm saying that, you know, every generation, you give one, you get one. You give one, you get one. You give one, you get one. All of a sudden, there are two people.


[User] Please transcribe this text

[Assistant] So they're, they're each giving one, so none, none of them is better off, is worse off than before. When they get old, they're gonna need to, you've only got one person contributing. So here's the baby boom, you know, double the size of all the other generations.


[User] Please transcribe this text

[Assistant] So, but, you know, when they're old, it looks like a problem. Who's gonna take care of these people? They're not enough young people to take care of them. But remember, they were young before they were old. So since this mother only needs one, and there are two of these daughters, the extra one could be invested, and the one that's invested is gonna make a rate of return and become more than one, like close to two.


[User] Please transcribe this text

[Assistant] And so you'll have the one from the new daughter plus almost two from, from, that was, you know, saved and earned up, you know, that's in the Social Security Trust Fund and earning interest.


[User] Please transcribe this text

[Assistant] So basically, what did the baby boom do? It staved off the original problem. So let's just think about this one more time.


[User] Please transcribe this text

[Assistant] Suppose that you have a slightly more realistic example, the kind you're going to do in the problem set. So suppose that you've got, uhm, uh,


[User] Please transcribe this text

[Assistant] People live from 20 to 80 and they pay taxes and work from 20 to 60 and they retire from 60 to 80.


[User] Please transcribe this text

[Assistant] Okay, and everybody's paying 12 dollars in social security taxes when working and there's a zero rate of interest and they're getting 24, well maybe I have a rate of interest, they're getting 24 dollars.


[User] Please transcribe this text

[Assistant] So the system balances every year because in every generation,


[User] Please transcribe this text

[Assistant] These are the birth years. The thing started, you know, in 1938. And then,


[User] Please transcribe this text

[Assistant] They collect the taxes for a little while and then they start, I mean they, uh,


[User] Please transcribe this text

[Assistant] So you see in 1940, the people who are 60, the 1880 generation, would have two decades to live. So these guys...


[User] Please transcribe this text

[Assistant] You know, the, the, the 60 year olds and the, you know, the 60 year olds here are, and these 70 year olds, the 70 year olds and the 60 year olds are collecting money.


[User] Please transcribe this text

[Assistant] Now the original start of Social Security was a little fuzzy, they didn't want to pay people who had never contributed, but, so these 70 year olds weren't really getting anything, but,


[User] Please transcribe this text

[Assistant] Okay, let's just keep for the simple steady state. So the, uhm, so the point is the 60 year olds are collecting 24 dollars.


[User] Please transcribe this text

[Assistant] And then here are the contributors. This new generation has now come on board to contribute. So again, there's balance every generation. Okay, but now who are the winners and the losers?


[User] Please transcribe this text

[Assistant] Well, you know, it's much worse than it sounded at first glance, because people live longer than one year. So you see, these people, from the 40s, in the 40s, all these guys were gaining. So this generation of 1870s, they have almost an infinite rate of return. They made no contribution.


[User] Please transcribe this text

[Assistant] Okay, these guys, they also made no contributions and they're getting huge returns because they're getting them, you know, 20 years of returns.


[User] Please transcribe this text

[Assistant] But it's worse than that, because when we go to the next generation, these guys, they actually contributed when they were in their 50s, but that wasn't very long before they retired, and they got, you know, 24, they got, uh,


[User] Please transcribe this text

[Assistant] You know, they've got $24 of benefits and $24 of benefits having only paid $12 of taxes. Of course, this came later, but 48 compared to 12, they got a gigantic rate of return. Well, you go to the next generation, and they're making out like bandits too, because they only contributed twice.


[User] Please transcribe this text

[Assistant] Okay, so in the forties, a bunch of people were making money, getting benefits who didn't make any contributions.


[User] Please transcribe this text

[Assistant] In the 50s, a bunch of people were making, uh, getting benefits who made no contributions. In the 60s, there are still people getting benefits who made no contributions. It's not until you get to the 70s, 40 years, or the 80s, what am I talking about, the 80s, once people are fully retired, you know, have made


[User] Please transcribe this text

[Assistant] 40 years of contributions. So from 40 to 80, it's not until the 80s.


[User] Please transcribe this text

[Assistant] If you just do the distributive law of arithmetic and you realize that all of these things go off to infinity because they're discounted, you can sum them in either direction. You can sum down the column.


[User] Please transcribe this text

[Assistant] But therefore, if you add up the rows, which is what each generation gets, they also have to add up to zero. But you see, there's so many original generations. This one got a huge benefit. This one got huge benefits. The present value of their contributions relative to their benefits is incredibly positive for that generation.


[User] Please transcribe this text

[Assistant] For this generation, it's still incredibly positive. Remember, this is 12-12 and this is 24-24. For this generation, it's probably still positive. Not till you get to here has it become, you know,


[User] Please transcribe this text

[Assistant] Well, not until you get to here does something change. So this is a positive number, this is a big positive number, this is a gigantic positive number, and this is a huge positive number. You add up over all these things positive,


[User] Please transcribe this text

[Assistant] Present failure, the same bad rate of return. And there were so many generations that got positive amounts of money. So in today's dollars, can you tell me how much money that we gave away to these early generations? Can you take a guess? Just quarter of magnitude.


[User] Please transcribe this text

[Assistant] Couple trillion. Does someone want to guess? A reasonable guess? Does someone want to make another guess? Just so you get an idea of the size of the program. Does anyone know what GNP is in the country?


[User] Please transcribe this text

[Assistant] Okay, 14 trillion, something like that is GNP. So what, so what do you guess this number is? Okay, it's 17 trillion.


[User] Please transcribe this text

[Assistant] So he guessed 2 trillion. It's 17 trillion. So we made a staggering transfer of income


[User] Please transcribe this text

[Assistant] To these people at the beginning, and now somebody's gotta pay for that. And it's not a trivial thing to pay for because 17 trillion. If everybody gave every corporation, every, you know, person in the whole country gave away all the money they made for a year, we still wouldn't pay it down. Okay? So, that's a big amount that's hanging over everybody.


[User] Please transcribe this text

[Assistant] Okay, and that's what the social security problem is. We gave away so much money at the beginning, if we keep the system in balance, we're never, we have to gradually give all the money back.


[User] Please transcribe this text

[Assistant] Power in the 50s and 60s, you know, when we're still helping all those people. But the point is there's a tremendous transfer of wealth to the retired generations of that era.


[User] Please transcribe this text

[Assistant] And that's the reason why everybody's getting such a bad rate of return now. It's not because the money's being lost or thrown away. Okay, so what I'm telling you now is not controversial.


[User] Please transcribe this text

[Assistant] You know, I don't think many people understand it, but it's, you know, everyone who does understand it agrees with it. When we come to my solution, they're not going to agree. But anyway, so what I'm telling you, so...


[User] Please transcribe this text

[Assistant] So just to compute, so in the problem set you have to compute an example. So let's just see how this would work.


[User] Please transcribe this text

[Assistant] So suppose, from the point of view of a 10 year old, just doing the example I did, suppose there's a 15% rate of interest.


[User] Please transcribe this text

[Assistant] And you're going to contribute in your 20, 12 dollars, 12 percent, 12 dollars,


[User] Please transcribe this text

[Assistant] In your, so no growth in the economy, so it's $12 all the time when you're in your 20s, 30s, 40s and 50s.


[User] Please transcribe this text

[Assistant] You discounted at the 15% rate of interest. You're going to be doing, you know, contributing $12 in your 30s. You discounted at 15% twice.


[User] Please transcribe this text

[Assistant] In your 40s, you're giving up $12, you're discounting it to 15% three times, and in your 50s, you're doing it $12, you're discounting it four times. So that's the present value of what you've


[User] Please transcribe this text

[Assistant] You know, from the point of view of a child, you know, a young girl looking at what you're going to be forced to contribute over your life, those are the taxes you can expect to pay in present value terms. Now, of course, when you get old, in your 60s and 70s, you're going to get


[User] Please transcribe this text

[Assistant] Uhm, you know, you can get benefits, $24, much higher than the taxes you paid, but by then, it's five decades later, so you're just counting it five times, and when you're in your 70s, you're just counting it six times.


[User] Please transcribe this text

[Assistant] So, you have to divide, you know, discount by 6, and so the present value of that is way less than the present value of this.


[User] Please transcribe this text

[Assistant] So, you see that the loss in present value terms is going to be $11, $11 out of 34, which is what your benefits were, so your loss is something like 34%.


[User] Please transcribe this text

[Assistant] So this is just, uh, you know, I just made up these numbers. The actual loss, which I computed for the real economy,


[User] Please transcribe this text

[Assistant] So that's how, how big each generation, a quarter of the typical, so here it's 34%, a quarter to a third, in this example, of each generation's social security taxes are simply being lost, frittered away, and handed, you know, basically used to pay off that, that origin, the debt from the original generation. Okay?


[User] Please transcribe this text

[Assistant] Now, if you want to look at the total present value loss, starting in the 1930s,


[User] Please transcribe this text

[Assistant] You have to, for people born in the 1930s, you have to look at


[User] Please transcribe this text

[Assistant] Okay, and so I just do one, but you're gonna do that anyway. Alright, so, that's it. So now, if you look at which generation's got the most money,


[User] Please transcribe this text

[Assistant] Uhm, you know, at the beginning there weren't many people in social security, and so the amount of money that they got, the benefits the really old got, there were so few of them, that if you added up it wasn't that big. But, so the generation that benefited the most was my father's generation, and James Tobin's generation.


[User] Please transcribe this text

[Assistant] Tobin, as we'll see in a second, he used to tell me all the time, he was Yale's most famous economist.


[User] Please transcribe this text

[Assistant] And, uh, he also went to the same high school he went to in Illinois.


[User] Please transcribe this text

[Assistant] He used to tell me that the problem with Social Security was we didn't have enough, you know, I didn't have enough children.


[User] Please transcribe this text

[Assistant] And I would tell him the problem with Social Security was we gave him his birthday too much money. And that's why we're all suffering now.


[User] Please transcribe this text

[Assistant] So you can see all the generations and which one, which generation got the most amount of, uh, money. So that's also calculated. Okay.


[User] Please transcribe this text

[Assistant] So, now, this parable is not exactly accurate.


[User] Please transcribe this text

[Assistant] So by the way, so you know in the parable we should have had a crisis in 19, uhm,


[User] Please transcribe this text

[Assistant] 70. It should have been 1980. I told you the people in 1980 should already have, uh, realized the generation


[User] Please transcribe this text

[Assistant] Starting to work in 1980, so born in 1960, a lot


[User] Please transcribe this text

[Assistant] What kept the gen, you know, what kept the problem from manifesting itself until now, well what kept the problem from manifesting itself until now is actually quite easy to see, is there were a lot more young people per old in, in the historical generations, and you know, now we're leveling off and everybody thinks they're gonna be


[User] Please transcribe this text

[Assistant] You know, too young people for every old. The story I sort of told, working from 40 to 60 and retired from 60 to 80 in a stable population, that's coming close to what we're converging to. So they're going to be too young for every old. There used to be 3, 4, and 5. Now how could there have been so many young for all the old?


[User] Please transcribe this text

[Assistant] Well, you know, women at the beginning weren't, you know, in this period, they were working. Women were surging into the labor force. There were a huge number of young women working, but their mothers actually weren't working. They had not worked, and so they were getting half their husband's benefit.


[User] Please transcribe this text

[Assistant] Not the full benefit that these daughters who are working their whole lives are gonna get. They're not gonna take half their husbands benefits, they're gonna take all their own benefits, which are gonna be a lot higher.


[User] Please transcribe this text

[Assistant] Uhm, you know, then there was the baby boom generation. The baby boom generation, far from causing the problem, has deferred the problem. You know, there are all these surpluses because we were working so long. Okay, so uhm, I don't want to get into all the details. Uhm, people are living longer now too, so that's another problem.


[User] Please transcribe this text

[Assistant] Okay, so uhm, too much complication here. Okay, so what can you do about this? Well, there are obvious things to do, which


[User] Please transcribe this text

[Assistant] So one thing you could do is you could say, well if we're supposed to be paying the average young person forty percent,


[User] Please transcribe this text

[Assistant] You know, we can maybe shave the 40% down a little bit. Let's make the social security tax 18% instead of 12%. So you could raise it by 6%.


[User] Please transcribe this text

[Assistant] Okay, that would be, uh, a shocking, okay, so I think that nobody wants to actually do that because, you know, an increase of 6% in the tax rate is an astronomical increase.


[User] Please transcribe this text

[Assistant] And, uh, you can read in the newspapers how low Congress is to raising taxes. Okay, another obvious thing you could do...


[User] Please transcribe this text

[Assistant] If you could reduce the, you know, raise retirement age.


[User] Please transcribe this text

[Assistant] So instead of saying it's 65 because people live, you know, till 80, make it start at 67. So you don't have to pay them, you know, for 15, 13 years instead of 15 years. In this example, you know, 18 years instead of 20 years. So you can keep raising the retirement age. The problem with that is,


[User] Please transcribe this text

[Assistant] Not the retirement age, the age you start collecting social security. The problem with that of course is that people retiring


[User] Please transcribe this text

[Assistant] Not later and later, even younger and younger, believe it or not. And so you're getting this huge gap between when people retire and when they start getting Social Security. So there's a limit to how, so obviously you should do a little bit of that, but there's a limit of how much, how much of that you can do.


[User] Please transcribe this text

[Assistant] Okay, so what does it mean to privatize? How are they going to do that? So what Bush had in mind, what Bush had in mind was the following. He said, uh,


[User] Please transcribe this text

[Assistant] What is privatization? It involves three things.


[User] Please transcribe this text

[Assistant] It's the creation of individual accounts. Your name goes on it. So it's your account, your money, and no one can take it from you.


[User] Please transcribe this text

[Assistant] It's your money, and your money is what's going to pay for your own benefits, so it's pre-funded.


[User] Please transcribe this text

[Assistant] Okay, so it's individual accounts and pre-funded, and it's diversification. You're supposed to invest not just in government bonds, but in the stock market, whatever else you want. So those are the three cornerstones of, of, uh, at least the way I've explained them, of privatization. Three things it accomplishes. It gives you your name on the money.


[User] Please transcribe this text

[Assistant] It's your money, that's the money that's gonna pay you when you get old, pre-funding.


[User] Please transcribe this text

[Assistant] And you can invest in a wider range of assets, especially the stock market, which is what everybody seems to want to put their money in or at least used to until we had this last crash. On the other hand, the stock market is going up a lot, so people are getting less nervous about it. So, uhm, those things are different. They're not the same.


[User] Please transcribe this text

[Assistant] So Bush said, I want to privatize. I want the 12% that you pay in Social Security taxes. I want 4% of that.


[User] Please transcribe this text

[Assistant] For you to be able to put that in your private account in the stock market with your name on it.


[User] Please transcribe this text

[Assistant] Okay, so Gore said, well that's ridiculous. If there's only 8% then left to give to the old people, the old people are gonna get cheated.


[User] Please transcribe this text

[Assistant] So, how, how is Bush gonna handle that? What do you think he's gonna do?


[User] Please transcribe this text

[Assistant] So, and I don't know what Gore was thinking, especially since I was


[User] Please transcribe this text

[Assistant] You know, but he just said in the debate, that's impossible, you'll just screw all the old people, so.


[User] Please transcribe this text

[Assistant] Okay, so you're supposed to be giving 12%, you know, 12 here, minus 12 here.


[User] Please transcribe this text

[Assistant] And then getting some return over here, and now Bush is saying, I only want to give you eight dollars, and the other four you put in your, uh, social security account, and then you're gonna get maybe a much bigger return here, cause, uh, sorry, in your


[User] Please transcribe this text

[Assistant] So Bush would say, yes, let people put their names on it, force them to save and contribute the whole $12. Bush agrees that you gotta force young people to save because they're not gonna do it otherwise. So you put the $4 on their private account, but it's their name on it, and then it grows to some huge number, you know, 20, instead of just doubling by the time they get old. And so that huge account is their money. So uhm, that's what Bush would say.


[User] Please transcribe this text

[Assistant] So, Gore would say, well if you take these four dolls and give it to them, how are you going to, uh,


[User] Please transcribe this text

[Assistant] How are you gonna, you know, pay the old people who need the 12 right up here?


[User] Please transcribe this text

[Assistant] Well, it's not like Bush and his advisors didn't think about that. That would, you know, that would be a colossal blunder. Of course they thought about that. So what were they going to do?


[User] Please transcribe this text

[Assistant] Okay, these people. So if this, if you chose


[User] Please transcribe this text

[Assistant] You have to pay the interest at the end of 30 years. So this 8 comes out of your 20.


[User] Please transcribe this text

[Assistant] Okay, so, so the government, so these people, uh, so these people pay back the aid.


[User] Please transcribe this text

[Assistant] So basically, to say it in a different way, the way you get to invest in the stock market according to the Bush privatization rules is these people effectively, they're giving the $12 anyway to the old, but they get to borrow $4 and put it in their private


[User] Please transcribe this text

[Assistant] Stock market account, and then they have to pay back the amount they borrowed with interest, which is eight.


[User] Please transcribe this text

[Assistant] But if the stock market does better than the, uh, than the interest rate, then of course they make out better. They get 20 minus 8, which is 12.


[User] Please transcribe this text

[Assistant] Okay, so is that clear how he did it? So it's not a logical impossibility.


[User] Please transcribe this text

[Assistant] The problem with the Bush plan, of course, is that if the money you put in the stock market earns the same rate of return that you would have gotten anyway, uh, you know, if the stock market earns the same rate of return 100% over all those years as the bond market, then this


[User] Please transcribe this text

[Assistant] Private stash you have just goes back to paying off the government debt and you haven't gained anything in the stock market. You get the same social security benefits you would have had anyway. So these guys who opt into the privatization program, let me repeat the Bush plan, if you opt into the privatization program you effectively


[User] Please transcribe this text

[Assistant] Do everything you did before in social security. You pay your taxes that go to the old people, you get the benefits just like you did before, but on top of it you have the right to borrow four dollars from the government, invest it in stocks, and then at the end you have to pay back the government out of your stock market returns.