Thursday, December 23, 2004

Social Security, part 1

Basic Facts on Social Security and Proposed Benefit Cuts/Privatization, by Dean Baker of the Center for Economic and Policy Research.
Even the mainstream media is catching on.
But that hasn't stopped the conservative media from trying to cover the truth.


Blogger Management said...

Basic Facts on Social Security and Proposed Benefit Cuts/Privatization

Dean Baker and David Rosnick1

November 16, 2004

1) Social Security is Financially Sound

According to the Social Security trustees report, the standard basis for analyzing Social Security, the program can pay all benefits through the year 2042, with no changes whatsoever. Even after 2042 the program would always be able to pay retirees a higher benefit (in today's dollars) than what current retirees receive. The assessment of the non-partisan Congressional Budget Office is that Social Security is even stronger. It projects that Social Security can pay all benefits through the year 2052 with no changes whatsoever. By either measure, Social Security is more financially sound today than it has been throughout most of its 69-year history.

2) President Bush's Social Security Cuts Would Be Large

The proposal that President Bush is using as the basis for his plan phases in cuts over time. A worker who is 45 today can expect to see a cut in guaranteed benefits of around 15 percent. A worker who is age 35 can expect to see a cut in the guaranteed benefit of approximately 25 percent. A 15 year old who is just entering the work force can expect a benefit cut of close to 40 percent. For a 15 year old, this cut would mean a loss of close to $160,000 in Social Security benefits over the course of their retirement.

Private accounts will allow workers to earn back only a small fraction of this amount. For example, a 15 year-old can expect to make back approximately $50,000 from the $160,000 cut with the earnings on a private account. If this worker retires when the market is in a slump, then it could make their loss even bigger.

3) Imaginary Stock Returns Don't Offset Real Benefit Cuts

Proponents of private accounts have often used highly exaggerated assumptions on stock returns to argue for the benefits of private accounts. For example, even at the height of the stock bubble in 2000, when the price to earnings ratio in the market exceeded 30 to 1, many proponents of private accounts assumed that stocks would generate 7.0 percent real returns annually. This assumption was absurd on its face - it implied that price to earnings ratios would rise to levels of more than 100 to 1. Unfortunately, even the Social Security Administration has used these unfounded assumptions in assessing privatization plans.

Given current price to earnings ratios and the Social Security trustees' profit growth projections, real stock returns will average less than 5.0 percent annually. Some proponents of private accounts are still using exaggerated stock return assumptions to advance their case.

4) Social Security is Extremely Efficient, Private Accounts Are Wasteful

On average, less than 0.6 cents of every dollar paid out in Social Security benefits goes to pay administrative costs. By comparison, systems with individual accounts, like the ones in England or Chile, waste 15 cents of every dollar paid out in benefits on administrative fees. President Bush's Social Security commission estimated that under their system of individual accounts 5 cents of every dollar would go to pay administrative costs.

In addition, under Social Security workers automatically get an annuity (a life-long monthly payment) when they retire. By contrast, financial firms typically take 10 to 20 percent of workers' savings to provide an annuity when they reach retirement.

5) Social Security Pays the Most to Those Who Need it Most

Social Security benefits are highly progressive, so that low wage workers get a much higher share of their wages in benefits than do high wage workers. A worker who earned $10,000 a year during their working lifetime can expect to see a benefit that is equal to approximately 75 percent of their average wage. A worker who earned $33,000 a year will get a benefit that is equal to approximately 45 percent of their wage, while a worker who earned $50,000 on average will get a benefit that is equal to 39 percent of their wage.

While poorer workers do not live as long as higher paid workers, the progressive benefit structure largely offsets differences in life expectancy (as do disability and survivors benefits for those who do not live to normal retirement age). Furthermore, since plans are being made for the distant future, the United States could reduce the gaps in life expectancy by income and race, as other countries have done.

6) The Projected Shortfall is No Larger Than What We Have Seen In Past Decades

It has been necessary to raise Social Security taxes in the past, primarily because people are living longer than they used to. The tax increase that would be needed to make the program fully funded over its seventy five year planning period is actually smaller than tax increases we have seen in prior decades. In other words - it would have made more sense to talk of a Social Security "crisis" in 1965 than in 2005. In fact, according to the Congressional Budget Office estimates, Social Security can be made solvent throughout its seventy five year planning period with a tax increase that is less than one quarter as large as the one in the eighties.

While tax increases are never popular, the fact is that prior tax increases did not prevent decades like the fifties or sixties from being periods of great prosperity. Of course, if the economy maintains anywhere near its recent pace of growth, any tax increases can be put off for many decades into the future, and possibly forever.

7) Young Workers Will Still See Much Higher Wages If Taxes Are Increased

If it proves necessary to raise more money for Social Security through taxes, workers will still see large increases in their after-tax wages. This is true even if they end up paying a larger share of their wages in Social Security taxes. According to the Social Security trustees' projections, the average after-Social Security tax wage for a worker in 2050, will still be more than 70 percent higher than it is today, even if taxes are raised to keep the program solvent. The CBO projections imply an even larger increase in after-tax wages.

Raising payroll taxes is not the only way to increase the revenue for Social Security. An alternative is to raise the ceiling on taxable wages. Currently, no Social Security taxes are paid on income earned above $87,900 in any given year. If the ceiling were raised to $110,000 to cover 90 percent of the country's income from wages (the level set by the Greenspan commission in 1983), it would eliminate approximately 40 percent of the projected funding shortfall. Using the CBO projections, this change alone would be almost enough to make the program solvent through the seventy-five year planning period.

8) The Bush Proposal Phases Out Social Security as We Know It

President Bush's proposal gradually shrinks the traditional guaranteed Social Security so that it will eventually become irrelevant for middle income workers. For today's twenty year old average wage earners, the guaranteed benefit will be equal to just 15 percent of their annual earnings when they reach retirement age. The guaranteed benefit will be equal to just 7 percent of annual earnings for a child born ten years from now.

As the traditional Social Security benefit becomes less important for middle-income workers, Social Security will increasingly become a poor people's program. This may be a clever strategy if the purpose is to undermine political support for Social Security; it is not a good way to structure the program if we expect it to be there for our children and grandchildren.

12:36 AM  
Blogger Management said...

Critics downplay Social Security problems
WASHINGTON (AP) -- Critics of President Bush's plan to create personal investment accounts in Social Security say he is exaggerating the program's funding problems to boost public support for his idea.

"Social Security is like a car with a flat tire," said Peter Orszag, an economist at the liberal Brookings Institution and adviser in the Clinton White House. "There is a problem. We need to fix the flat tire. But we don't need to replace the car."

But David John, a senior analyst at the conservative Heritage Foundation, said the funding problem is real, especially for younger workers. "Every day we delay raises the cost of a repair to Social Security," he said.

The retirement system faces a projected $3.7 trillion, 75-year shortfall. Bush wants to overhaul the program to let younger workers divert some of their Social Security payroll taxes to personal accounts. But that alone won't fix the problem and could require upfront costs of $1 trillion to $2 trillion over 10 years.

Bush regularly claims Social Security faces a shortfall of nearly $11 trillion, which, Orszag said, is a misleading figure because it makes the system appear to be in worse shape than it is.

The figure -- $10.4 trillion to be precise -- is the shortfall over the "infinite horizon," as measured by Social Security's Board of Trustees. The calculation was included for the first time in the trustees' 2003 report, along with the required 75-year measure. The American Academy of Actuaries criticized the use of the $10.4 trillion figure in the report, saying it was likely to mislead the public.

Orszag said Medicare's dwindling finances are more urgent than Social Security's. Medicare began dipping into its trust fund this year, and it is expected to be exhausted in 2019, trustees said.

Social Security's financial picture was little changed from last year. The system is expected to begin paying out more in benefits than it collects in taxes starting in 2018, with the trust fund money the government owes depleted by 2042.

Rep. Bob Matsui of California, the top Democrat on the House Social Security subcommittee, said the retirement system is not in crisis and "is a manageable problem.

Bush, asked Monday at a year-end news conference about the need to address Medicare's funding problems first, said those issues were tackled with a sweeping Medicare package that includes a prescription drug plan being added in 2006 in addition to a number of lesser-known changes in the way the system operates. Depending on estimates, the government will spend from $400 billion to $535 billion on Medicare changes over the next 10 years.

Bush repeated his demand for congressional action on Social Security, but refused to provide details.

"Don't bother to ask me," he said, making clear he would not engage in a public debate about Social Security until he gives Congress "a solution at the appropriate time."

The administration has said a plan is still being crafted.

"The temptation is going to be ... to get me to negotiate with myself in public. To say, you know, 'What's this mean, Mr. President? What's that mean?' I'm not going to do that," Bush said. "The law will be written in the halls of Congress. And I will negotiate with them, with the members of Congress."

Bush continues to spotlight the Social Security's future financial problems and the positive aspects of his plan to allow people to create a retirement nest egg they own and mostly control -- without raising the payroll taxes that fund Social Security or cutting benefits for retirees or those nearing retirement age.

Such a change comes with a cost: If money is diverted to private accounts, the government must replace it to continue paying benefits.

Bush has said benefits would not change for retirees and people nearing retirement, but he has not given age ranges. A commission he created in 2001 to study Social Security has proposed letting workers under age 55 open private investment accounts.

To help address the future long-term shortfall, a private account system would cut the government benefits promised to workers who choose a private account, with those investments expected to make up the difference.

12:37 AM  
Blogger Management said...

The National Review's Jonah Goldberg--who covers a Limbaugh-like fealty to the facts with a thin veneer of Buckley-esque intellectualism--has a whopper in today's Philadelphia Inquirer (and elsewhere).

Goldberg argues that all this opposition to privatizing Social Security springs from liberals' sentimental attachment to the memory of FDR:

I have some advice for the small-c conservatives and reactionaries in the debate over Social Security reform: Franklin Roosevelt is dead. Get over it.

It seems every time I turn on the TV or the radio, I hear some opponent of reform whining that we're tinkering with FDR's "legacy." Who gives a rat's patoot?

If the current Social Security system is a good deal, then it's a good deal. Period. If it's a bad deal for 300 million Americans, then it's a bad deal. Only a moron of ground-shaking proportions would argue that we should swindle millions of low- and middle-income (or even, yes, rich) Americans out of a better retirement - and their own money! - out of respect to Franklin Delano Roosevelt's memory.

While Goldberg concedes "almost no one rests the whole argument on this legacy thing," he goes on to say: "This notion - that Social Security is some kind of secular tithe to the false god of FDR - is intellectually and morally offensive. It is dishonest."

But it's hard to imagine a less intellectually honest argument than Goldberg's. One can only guess that the "opponents" to which he refers are those liberal voices that whisper in his head, because in the real world, nobody's making that argument.

Paul Krugman has been asserting [$$] that there is no crisis, an argument also favored by Robert Kuttner, who says the whole proposal is an example of bait-and-switch politics. Robert Reich and others--like the Center for American Progress's Christian Weller have decided to take on the "Ownership Society" agenda as a whole, focusing on the difficulty lower-income Americans' have putting money into savings and the vast inequality of accumulated wealth.

Even Teddy Kennedy's speech extolling an "Opportunity Society," which did look back at the history of progressive politics in America--including the New Deal-- didn't call for a progressive revival in order to honor the memory of FDR.

Those who invoke Roosevelt's legacy do so as a shorthand for the social safety net he created--that which conservatives seem intent on dismantling.

I agree with Michael Tomasky's argument that the best way to oppose SS privatization is to appeal to people's self-interest:

Many of the arguments I hear -- from smart people -- are built around the idea that the system is not in crisis. This happens to be true. But it also happened to be true that Saddam Hussein had no weapons of mass destruction, and it happened to be true that President Bush's tax cuts disproportionately benefited the super-wealthy. Truth doesn't particularly matter.

What matters is people's self-interest. Liberals don't think enough about people's self-interest. We want people to think about the common interest, because that's what we think about, and so we think everybody ought to think about it, and we can't understand why they don't.

Tomasky pictures a commercial with a down-homey couple talking in their kitchen over the morning paper:

Louis: "Gee, Harriet, it says here that this Social Security privatization is going to have to result in benefit cuts for future retirees."

Harriet: "Really, Louis? But I though the president said we'd be able to make more."

Louis: "Well, that isn't what it says here. And some of the fellas at work have said, too" [Personal validation is crucial, because we all know we can't trust the media.] "that privatizing won't really fix what's wrong. There'll still be a shortfall, and that will have to be made up through cuts to future retirees."

Ruy Teixeira (who sits on the Gadflyer's Board of Advisors) backs up Tomasky's argument with an analysis of polling data.

The real arguments against President Bush's Social Security plan have merit, so Goldberg ignores them. After all, it's easier to knock down straw men than it is to come up with a compelling justification for racking up $1 or 2 trillion dollars in new debt in order to throw a luau for Wall Street equity traders.

10:50 PM  
Blogger Management said...

Social Security

A better fix than privatizing Social Security

By Edith U. Fierst
Source: Christian Science Monitor | Date: November 30, 2004

WASHINGTON - The president's determination to partially privatize Social Security stems from ideological reasons. But in fact the projected Social Security deficit is small enough - 1.89 percent of payroll, under the Social Security trustees' intermediate assumptions (neither optimistic nor pessimistic) - that a major revision to the system is not necessary. The deficit can be remedied with a few discrete changes in the program, all of which are surprisingly easy to understand and accept.

The first is to raise the earned income on which the Social Security payroll tax is assessed and benefits are paid. At present, the maximum is $87,900 a year, subject to annual indexing to wage growth. But it could be raised gradually over several years to 90 percent of covered earnings of individuals, from its current level of about 85 percent, and indexed thereafter. If that were done, the additional payroll tax paid by the 6 percent of those who earn more than $87,900 would reduce the long-range deficit by 0.61 percent of payroll.

A second proposal is to keep the tax on estates worth $3.5 million and more and dedicate the proceeds to Social Security. At present, the tax applies to estates valued at a minimum of $1.5 million. In 2009 the exemption rises to $3.5 million and the following year the estate tax is scheduled to end. Dedicating the tax on estates worth $3.5 million and over, and retaining it, would reduce the long-range deficit by another 0.6 percent of payroll.

A third change would be to bring all newly hired public employees under mandatory coverage of Social Security, thereby reducing the long-range deficit by about 0.22 percent of payroll. About 6.7 million state and local government employees are currently exempt - virtually the only workers not covered by America's retirement system. Instead these employees are covered by plans operated by their employers. For long-term employees, the benefits of state and local government plans are often greater than those paid by Social Security. But these plans, unlike Social Security, are not portable, so employees who change jobs or employers may lose their coverage. If they become disabled before acquiring substitute coverage, they may be without disability benefits. Furthermore, the dependents of public employees exempt from Social Security, even employees fully covered by state and local government plans, are unlikely to be protected by disability, spouse, or survivor benefits.

If coverage were to be broadened to include newly hired public employees, the governments involved would need time and possibly financial help to phase in the new coverage. Delicate negotiations between these governments and public-employee unions might be required, but the example of how smoothly newly hired federal employees were brought under mandatory coverage and a revamped federal retirement system in 1984 would be a good model.

The final change would be to adopt the more accurate formula for cost-of-living increases designed by the Bureau of Labor Statistics and in use by many programs. Using that formula would reduce the long-range deficit by 0.3 percent of payroll.

Delaying retirement age seems like a common-sense solution, but it would be a mistake. Many people retire early for good reason, such as physically demanding work, family responsibilities, or poor health. Social Security permits anyone to retire at age 62 with a reduction in benefits. The reduction for those who retire at 62 in 2004 is 24.17 percent of benefits. That reduction will go up to 30 percent for those who retire at 62 when the normal retirement age rises to 67 in 2027. Typically, early retirees have slim resources other than Social Security, so if the normal retirement age were raised further, the resulting reduction in benefits could be impoverishing.

Under the intermediate assumptions of the Social Security trustees, these recommended changes would save more than three-quarters of the projected deficit - which in any event won't threaten payments before 2042. If the lower deficits estimated by the Congressional Budget Office are right, they would wipe it out.

Guaranteed benefits after these changes would be far better than privatized accounts, full or partial, because:

:: Individual accounts are inevitably insecure when the market goes down or the worker makes poor investments.

:: With private accounts, but not Social Security, the retiree runs the risk of outliving benefits unless he or she purchases an annuity, usually at considerable expense.

:: Administrative costs, now about 1 percent of benefits, would go up because individual accounts would have to be administered separately and commissions paid.

:: Spouses, survivors, and other dependents of workers would lose their benefits if the worker decides to stop sharing with them.

Moving to privatization - even partial - would also be enormously expensive; the government would have to pay for benefits for older retirees if contributions of younger workers were to go into their own private accounts.

In short, privatization unnecessarily risks the security of Americans during retirement or disability. Guaranteed benefits under Social Security can and must be saved.

7:04 PM  

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