This week, several news outlets vastly understated the amount of money that a reported Bush administration proposal would allow workers to divert into private accounts from their payroll taxes, which are currently paid into the Social Security Trust Fund.
Under the present system, 12.4 percent of a worker's salary -- up to an annual maximum level of $90,000 in 2005 -- is paid into the fund. This amount is split evenly between employer and employee, each of whom pays 6.2 percent of the eligible salary.
According to numerous press accounts, the Bush administration proposal would allow workers to pay only 2.2 percent of their eligible salary into the Social Security Trust Fund, and to place four percent of their eligible salary, up to a presently unspecified limit on the total, into a private investment account. In other words, an employee could divert up to 64.5 percent of the total amount of employee-paid taxes into a private account.
But many press outlets have erroneously claimed that the plan would allow workers to divert only 4 percent of their payroll taxes, less than one-sixteenth of the actual amount.
The error seems to stem from a conflation of the terms “percent” and “percentage points.” That is, under the current Social Security system, 12.4 percent of a worker's salary is paid into the Trust Fund. Under the anticipated Bush proposal, four percentage points out of those 12.4 percentage points -- or a little less than one-third of the combined total paid into Social Security by the worker and employer -- could be diverted into private accounts. But many reporters appear to be confusing this with four percent of payroll taxes -- a very different number.
This common misunderstanding of the difference between “percent” and “percentage point” may be better illustrated by an example having nothing to do with Social Security: the increase from 40 percent to 50 percent will often be described as a ten percent increase. Rather, it is a ten percentage point increase -- and a 25 percent increase. That's a very significant difference. And when that type of error occurs in reporting about Social Security payroll taxes, it dramatically understates the amount of money that would be diverted into private accounts.
From a January 4 Associated Press article by AP writer Leigh Strope:
The Bush administration is focusing on a Social Security proposal that would allow younger workers to invest up to 4 percent of their payroll taxes in private accounts, with contributions limited to about $1,000 to $1,300 a year, an official said Tuesday.
From the January 4 edition of CNN's Lou Dobbs Tonight:
New information tonight on President Bush's plans to reform Social Security. According to reports by the Associated Press, an administration official now says the Bush Social Security plan would allow workers to invest up to 4 percent of payroll taxes in private accounts with an annual cap of $1,000 to $1,300.
From an article by Washington Post staff writer and FOX News Channel contributor Jeffrey H. Birnbaum, published in the Post January 5:
Late yesterday, the Treasury Department and the White House dismissed a report by the Associated Press that said the Bush administration was focusing on a Social Security proposal that would allow younger workers to invest as much as 4 percent of their payroll taxes in private accounts.
This is a common mistake, which members of the press have been making for years. For example, the AP's Strope made the same error in an August 2, 2001, article about Senate Budget Committee discussions on Social Security. In that report Strope incorrectly wrote:
Bush has suggested that younger workers could choose to invest up to 2 percent of their payroll taxes in the stock market, but hasn't said how to pay for it and is relying on his commission to work out details.
Bush's actual suggestion was that workers could invest up to two percent of their salaries or about 32 percent of the worker-paid portion.