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February 04, 2005
Bush's state of Social Security lies; even if the government does nothing about Social Security, benficiaries would still get more under the current system than under privatization
From Jeff Madrick in Salon: If the nation makes no reforms, the reduced benefits will still be higher for the typical retiree than benefits will be under the likely Bush administration privatization plan....President Bush's remarks mentioned only ways to reduce benefits -- restricting payments to the wealthy, raising the retirement age, discouraging early retirement. In fact, when you do the arithmetic, unless the president raises taxes somewhat, you find he is going to have to cut your benefits by a lot. He neglected to say that directly. Press reports said his fellow Republican urged him not to. He also neglected to say clearly that privatization, which will allow workers to divert part of their payroll taxes into private investment accounts run by Wall Street firms, is not going to change that one bit. Not in the first five or six decades, anyway, and depending on the plan, perhaps never. In fact, in the near run, it will only make matters worse. The government will have to borrow a couple of trillion dollars to compensate for the diversion of money into private accounts. There was no mention of how to finance that, which leaves the president with a perfect batting average so far. He has never discussed how he would deal with the transition costs. At least, in the only real bit of news, he said he will not propose implementing the plan until 2009... Far from being derelict, Social Security is easily the best run government program in America. And Social Security will neither collapse nor disappear, even if the nation does nothing to reform it. The gap between expected revenues and outlays will come to about 2 percent of the nation's wages over the next 75 years, or less than 1 percent of the nation's gross domestic product. That means the nation can cover the imbalance with a 2 percentage point increase in payroll taxes, from the current 12.4 percent, now equally shared by employers and employees. A massive increase in taxes? That is how the president characterizes it... The reason that privatization is no panacea, even if stocks pay significantly better returns over time than the present Social Security system does for an average worker, is that it will take too long for these accounts to build into a meaningful nest egg. In fact, diverting Social Security taxes to private accounts will hasten the system's insolvency. Second, investing in the financial markets is risky. First, stock and bond markets may not do as well in the future as they did in the past. Given how high stock prices are today, many economists think they probably will not. Second, many individuals will invest poorly and not earn average returns, often by a long shot. Third, just when you retire, the markets may be way down... The president seems to think that adding gains due to investment in private accounts will excite younger people. But even if a person earned, say, 4.5 percent a year in a portfolio of stock and bonds over 30 years, and paid a minimal investment management fee to boot, returns for a typical one-earner couple whose breadwinner retires in 2042 will still be less than the benefits promised under the present system. The eyes may be about to glaze over, I know. But just one last technical point. Many of those who opt for private accounts will not earn 4.5 percent a year. Many and perhaps most will earn just 3 percent a year or so, and even less. Under these circumstances, benefits including those gains from private accounts will actually be lower down the road than if even nothing were done to reform the current system. Let me say that one more time, because it is a stunner. If the nation makes no reforms, the reduced benefits -- down to about 70 percent of promised levels -- will still be higher for the typical retiree than benefits will be under the likely Bush administration privatization plan... |
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