What you won't learn from Wash. Post about Bush's Social Security plan


An article in the January 4 Washington Post by staff reporters Jonathan Weisman and Mike Allen reflected disputed assumptions and left out a key fact about the impact of Bush administration proposals on future Social Security benefit levels.

Explaining the Bush administration proposal, Weisman and Allen wrote:

Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker's lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century.

Weisman and Allen then proceeded to discuss how some of this reduction in guaranteed benefits would be offset by income generated from proposed private investment accounts. This, of course, would be true as long as the retirement accounts contained any money at all. However, in providing readers with a concrete example, they used numbers that are calculated based on an assumption about average rates of return in an investment account.

The principal omission in their report is the fact that the assumed rate of return on equities -- 6.5 percent -- made by the chief Social Security actuary is disputed by economists. As Dean Baker and David Rosnick, of the Center for Economic and Policy Research, as well as others, have argued, this assumed rate of growth is incompatible with assumptions about the rate of overall economic growth made by the Social Security trustees when they make projections regarding the future solvency of the Social Security trust fund. Baker and Rosnick claim that if average rates of return on equities were to be that high in the future, then the trust fund would remain solvent significantly longer than the trustees are currently predicting, perhaps indefinitely. Thus, the very premise of the president's proposal -- that Social Security faces a funding crisis -- would be completely undermined.

As University of California at Berkeley professor of economics J. Bradford DeLong wrote:

In other words, the stock market can attain its 6-7% per year real payoff only if the macroeconomic news in the future is much better than [the Social Security trustees are] projecting, in which case there's no Social Security financing problem at all.

Furthermore, even if one assumes that rates of return would average 6.5 percent, that number would indeed be just an average, meaning that many workers and retirees would actually experience a lower rate. Differences in the investment choices individual workers make, as well as year-to-year fluctuations in the overall stock market, will impact the value of these accounts upon retirement. This proposal exposes workers to risks that could potentially leave them with much lower retirement income than Weisman and Allen suggested in their article.

Weisman and Allen also left out an important detail. Under current law, both first-year benefit levels and the "income cap" -- the maximum amount of annual income that is subject to the payroll tax used to finance the Social Security system -- are adjusted annually according to the wage index. While Weisman and Allen reported that the Bush proposal would tie benefit levels to the consumer price index, which is expected to rise more slowly than the wage index, they failed to inform readers that the "income cap" would continue be tied to the wage index. In other words, the slower-growing consumer price index would determine increases in benefit levels, while the faster-growing wage index would determine increases in total payroll taxes paid.

Posted In
Economy, Social Security
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