Posted on 01/14/2005 11:46:20 AM PST by xsysmgr
In the debate over Social Security reform, the dollar figures involved can be dauntingly large and dizzyingly complex. That opens up a lot of opportunity for demagogic mischief, and the leftist opponents of reform are taking full advantage.
In fact, there seems to be no end to the Left’s demagogic innumeracy on Social Security. In an op-ed in the New York Times last week, Barry Schwartz, a professor of psychology at Swarthmore, wrote that “the administrative costs of keeping track of these private accounts, according to President Bush’s Commission to Strengthen Social Security, will be 10 to 30 times the cost of administering the current system.” But the President’s Commission’s report said that the administrative costs would be about the same as those of the current system: three-tenths of 1 percent per year. That’s 30 basis points — not 30 times.
Why the Times would hold out a professor of psychology as an expert on such matters is a mystery. And so far the Times has not run a correction (“public editor” Dan Okrent accused me of being “infantile” when I asked for one). Of course, the Left has already repeated the Times’s uncorrected statement. Three days later it appeared almost word for word (to put it delicately) in a Molly Ivins syndicated column. No correction there, either.
Ivins is on a roll. In another column this week, she wrote that “The Social Security trustees, paid to be professional gloom-mongers on this subject, say [the system is] good until 2042 ... not before Social Security goes broke, but before Social Security has to dip into its trust fund.” Dead wrong. What the trustees really say is that Social Security will start dipping into its trust fund in 2018. The year 2042 is when they say the trust fund will be entirely and utterly exhausted after 24 years of dipping. Correction? Surely you jest.
The Left has been playing “can you top this” when it comes to exaggerating the so-called “transition costs” of implementing personal accounts. The Washington Post started it when it dropped a bomb a few weeks before the presidential election, claiming the “cost” of private accounts would be $2 trillion. Since then the number has grown with every leftist retelling. Now, in his Tuesday New York Times column, Paul Krugman has the “cost” all the way up to $15 trillion.
In reality, there are no such “costs” — there is only government borrowing to make possible the diversion of tax dollars into private accounts. That borrowing is the consequence of the Social Security system’s deficit, which already exists and will come due in the future anyway. But Krugman can’t even get the amount of the borrowing right. His $15 trillion is derived from figures underlying a chart in a July 2004 Congressional Budget Office report. These figures unrealistically assume 100 percent participation in voluntary personal accounts. They are not adjusted for inflation — which exaggerates them by about 60 percent over the decades-long timeframe we’re talking about here, according to sources at the CBO. And they are calculated by an arcane stochastic simulation model, not a standard actuarial model.
Here’s the real deal: According to the President’s Commission’s report, in which these calculations were done under the supervision of the chief actuary of the Social Security Administration,
The amount required beyond that which is already accounted for by projected Social Security cash surpluses under ... is approximately $400 billion in present-value terms.
The worst leftist demagoguery concerns the question of just how deeply the Social Security system is in the hole. The best estimate of the system’s deficit is $10.4 trillion, this according to the most recent annual report of the Trustees of the Social Security Trust Funds. That $10.4 trillion is the present value of all of the system’s future liabilities, minus all its future revenues, and minus the value of the trust funds. Here’s a simple way to understand what that means: $10.4 trillion is the amount we’d need to inject into the trust funds today to make the system self-sustaining forever.
Leftist opponents of reform always quote a much smaller number — $3.7 trillion. But that’s only the present value of the system’s deficit for an arbitrary 75 year period. Why report the deficit for just that period? Why not 76 years, or 77? For that matter, why not just 3 years? Then everything would look really hunky dory.
The reason is that the 75 year analysis is a tradition with the Social Security trustees. That’s always been the way they’ve reported on the system’s solvency. But in the last 2 years they’ve looked beyond the arbitrary 75 year cut-off date, and they discovered there’s an abyss out there: a $10.4 trillion abyss.
All along it’s been arbitrary and dangerous to only look out 75 years — even though, intuitively, that may seem like a very long time. The reality is that, because of the aging of the American population, the economics of Social Security get very much worse in the distant future. So every year that goes by, a relatively good year for the system rolls off the analysis — a year in which FICA tax revenues still more than cover benefit payments. And every year that goes by, a new terrible year is added at the back end — a year in which the trust fund has been exhausted and benefits have to be either paid out of general tax revenues or cut. That’s why 22 years ago everyone thought the Social Security problem had been licked with the Greenspan tax hike. But now 22 good years have rolled off and 22 bad years have been added. And the system is worse off today than it was then.
That’s why leftist opponents of reform are wrong when the repeat — endlessly — the notion that there’s nothing wrong with Social Security that a little tax hike won’t fix. After a few years the system gets unfixed again, and it’s time for more tax hikes. But that’s the part the Left doesn’t want you to know about, so opponents of reform find themselves in the absurd position of having to defend the arbitrary and flawed traditional 75 year deficit analysis.
As is usually the case for the Left, the best defense of the indefensible is a good offense. And so we find a lengthy editorial in the New York Times last week trying to discredit the idea of looking beyond 75 years into the longer-term future of Social Security’s true deficit. Referring to the $10.4 trillion reality as a number pulled “out of the air” and “essentially bogus,” the Times cites a protest against the Social Security trustees’ adoption of it:
The American Academy of Actuaries, the profession’s premier trade association, objected to the change. In a letter to the trustees, the actuaries wrote that infinite projections provide “little if any useful information about the program’s long-range finances and indeed are likely to mislead any [non-expert] into believing that the program is in far worse financial condition than is actually indicated.” As it often does with dissenting professional opinion, the administration is ignoring the actuaries.
Kent Smetters, a Wharton professor who has been deeply involved in the Social Security Administration’s development of better diagnostics for assessing the system’s solvency, shared with me a letter he wrote to the Times — which, of course, the paper has refused to publish. In it Smetters wrote that “only a subset” of the American Academy of Actuaries subscribed to the dissent on which the Times relies:
More important, this subgroup’s protest was based on the incorrect claim that the infinite-horizon shortfall does not grow over time and, in particular, that larger reforms are not needed in the future if Congress delays action. Much to their embarrassment, the independent Public Trustees proved them wrong. Social Security’s independent chief actuary recently estimated that the imbalance grows by about $600 billion each year in which action is delayed.
So here’s what you need to know. The Social Security system is $10.4 trillion underwater right here, right now. The Social Security trust funds run out of money in 2042. Administrative costs of personal accounts would be about 30 basis points per year, the same as the cost of running the existing system. And the present value of the financing required to fund personal accounts is about $400 billion.
Those numbers are actually pretty simple, aren’t they? Now I wonder why the Left just can’t seem to get them straight?
— Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at don@trendmacro.com.
The LEFTS are not left brained?
Could it be because the truth gets in the way of their agenda?
A vote to do nothing is a vote to cut social security by 30%, starting in 2042, at the latest, and probably sooner.
Nice post!
The WSJ had a nice article a couple weeks ago about other nations' experience privatizing old-age programs. Privatization has been very successful around the globe:
How Others Do Social Security
December 27, 2004; Page A8
The U.S. is not alone in having a Social Security system on the brink of disaster. Pretty much every country that has a government-backed retirement system is in deep trouble. But the U.S. is almost alone in not having any plans, no matter how vague, to head off the crisis.
Mercifully, President Bush is about to change that. And understanding what other countries are doing should be an important part of the coming debate. So let us take a quick trip around the globe and look at how three countries on three continents have successfully re-done their retirement plans. A component of each is a private retirement account.
In general, there are three pillars to most retirement reforms. The first is a tax-financed, government-sponsored safety net. The second involves mandatory savings by workers -- usually in an individual, private account -- along the lines of reform proposals here. And the third pillar is voluntary savings by workers in private accounts, much like our 401(k)s.
Chile runs the most advanced and oldest of the reformed plans; it relies mostly on the second pillar. When it was established in 1980, workers were allowed to opt out of the government pension plan and contribute 10% of pre-tax wages to personal, private accounts. (Workers can also voluntarily contribute up to an additional 10%.) The money in these private accounts grows tax free; it is taxed only when retirement is taken and funds are withdrawn. Workers can choose among several private companies to manage their accounts.
At retirement, workers have the choice of three payout options: buying an annuity, leaving money in their account to be withdrawn monthly, or some combination of the two. And payouts will be big. Average real rates of return for these private accounts have been high -- around 10% a year. Just as nice, pension funds have now accumulated about $50 billion in assets. This giant pool of savings has contributed to the more than doubling of the rate of economic growth in Chile, which has been running at a little over 7% a year.
When the plan started, only 25% of eligible workers signed up. It has proved to be such a good deal, however, that now more than 90% of covered workers participate.
Australia started its reform program in 1992. Employers make mandatory payments of 9% of employee salaries into a privately managed fund. Currently, employers select the fund but, starting next year, workers will be able to choose among a variety of funds. Workers also have tax incentives to make additional, voluntary pension contributions.
Pension plan assets have grown from $238 billion in 1992 to almost $700 billion now. Almost 90% of workers are covered. At retirement, workers can take their money either as a lump sum or an annuity.
There is a problem with Australia's plan, however. Contributions are taxed three times: once when the money is contributed, then as it generates returns and finally when it is withdrawn. This tax-heavy process effectively shrinks the initial contribution rate from 9% to somewhere closer to 6%; there is, unsurprisingly, political pressure to increase the initial contribution rate to 15%.
And then there's Sweden -- otherwise known as the most socialized economy in the West. In 1998, Sweden transformed its retirement plan -- a defined-benefit, pay-as-you-go system -- into a mainly second pillar program requiring contributions of 18.5% of earnings, split between employers and workers.
The plan has two parts. The first part set up defined contribution accounts with a mandatory contribution rate of 16% of earnings. Returns are pegged to the growth in real wages, or a real return of 1.6% to 2% a year. The second part requires a contribution of 2.5% of earnings into individual accounts. Here, workers can choose among many investment options (including both domestic and global mutual funds) and returns depend on the success of each worker's investment strategy. At retirement age, the money must be withdrawn and annuitized.
These aren't just isolated instances of reform. The Chilean model has been so successful that parts of it have been widely copied throughout Latin America. And unlikely countries such as Germany have started offering private retirement accounts.
What this quick roundup demonstrates is that reform of Social Security should not be daunting. Most plans revolve around a strong second pillar reform but have a first pillar to provide a minimal safety net and third pillar to encourage additional, voluntary individual saving. Providing some sort of private accounts in the U.S. -- the world's premier capitalist country -- to give more workers a major stake in an ownership society should be a no-brainer.
People aged 50+ today don't have to worry about what will happen in 2042.
Not unless they live to be 87 or more.
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