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Outstanding
Stories of the Week
Hitting
the Tax-Break Jackpot
Edmund L.
Andrews
New
York Times, February
1, 2005, Page C1
This
article reports on how many corporations are using a special tax break that
allows them to pay a very low tax on repatriated foreign earnings for a year.
The article reports that most corporations are using this money to pay higher
dividends or for corporate buyouts. Few companies are using the money for the
new investment, which was the rationale for the tax break.
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Surviving
the Shift
Nell Henderson
Washington
Post, February
3, 2005, Page E1
This
article examines how workers have been faring over the last four years, as the
economy has shed millions of relatively high-paying manufacturing jobs and
replaced them with service sector jobs that generally offer low pay and fewer
benefits.
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Social
Security
President
Promotes Agenda at G.O.P. Retreat
David
D. Kirkpatrick
New
York Times,
January 29, 2005, Page A12
This
article reports on a Republican retreat where they plotted strategy for pushing
through President Bush's Social Security agenda. At one point it describes the
centrally managed system of individual accounts envisioned by some proponents of
privatization. It asserts that such a system could be administered at a very low
cost.
While
President Bush's Social Security commission estimated that the administrative
cost of such a system would be less than one third of the cost of the average
401(k), it is worth noting that their estimate was still ten times as high as
the administrative costs of the existing Social Security system. If the costs of
the current system are the base of comparison, then the administrative costs of
a centralized system are still quite high.
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Bush
Travels Next Week To Push Benefits Plan
Richard W.
Stevenson
New
York Times, January
29, 2005, Page A12
This
article reports on President Bush's plans to travel around the country to
promote his Social Security privatization plan. At one point the article reports
that Bush acknowledges that the shift to private accounts "would not by
itself eliminate the long-term financial short-fall."
Actually,
the shift to private accounts, by itself, doesn't affect the long-term shortfall
at all. Only cutting the guaranteed benefit affects the shortfall. Since private
accounts are projected to give roughly the same return as the government bonds
currently held by the Social Security trust fund (they give a lower return if
administrative costs are high and a slightly higher return if administrative
costs are kept to an absolute minimum) they also do not make more money
available to retirees.
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Bush Pledges to Take the Lead on Social Security Changes
Mike Allen
Washington
Post, January
29, 2005, Page A8
This
article discusses President Bush's plans to promote his Social Security agenda.
At one point it refers to projections by the Social Security trustees and the
Congressional Budget Office (CBO) that the trust fund will be depleted in 2042
and 2052, respectively. It reports that "for years beyond that, the
benefits would drop by 20 to 30 percent."
While
the payable benefit would be approximately 20 percent less than the scheduled
benefit in the CBO projections and 30 percent less in the trustees' projections,
the benefit itself would actually rise in the years following the trust fund's
depletion in both cases. The payable benefit would rise by roughly 1.0 percent
annually in the trustees' projections, so that in 2052, ten years after the date
of projected trust fund depletion, the payable benefit would be 10 percent
higher than in 2042. In the case of the CBO projections, the payable benefit is
projected to rise at the rate of approximately 1.2 percent a year, so that the
payable benefit would be approximately 12 percent higher in 2062 than in 2052.
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Talk
of Taxes, Social Security and Blogs at G.O.P. Retreat
David D.
Kirkpatrick
New York Times,
January 30, 2005, Page A21
Refiguring
Social Security Plan: Economists Add Their Numbers
David E. Rosenbaum
New
York Times, February 4, 2005,
Page A14
These
articles both make references to the dates when the Social Security system is
first projected to face financial problems. The article by Kirkpatrick reports
that Republicans want to promote fears about the year 2008 as a danger point for
Social Security, and comments that "even the most dire analyses say the
fund [the Social Security trust fund] will remain solvent for a decade or longer
after that."
Actually,
there is no analysis that shows the Social Security trust fund being depleted in
a decade. Even the trustees "high cost" projections, which assume GDP
growth of just 1.2 percent a year, show the trust fund lasting until at least
2030 (Table V1.F9), while the intermediate cost projection shows that the fund
will be able to pay all benefits until 2042.
The
article by Rosenbaum discusses the date when Social Security is first projected
to rely on the bonds held by the trust fund (2018 according to the Trustees,
2020 according to the Congressional Budget Office) to pay benefits as an
important date for Social Security. Under the law, this date has no meaning
whatsoever for Social Security, just as 2004 (the date when Medicare first began
to draw on its trust fund) had no meaning for the Medicare program.
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For
Democrats, Social Security Becomes a Defining Test
Sheryl Gay
Stolberg
New
York Times,
January 30,
2005, Page A21
This
article discusses the Democrats' strategy for dealing with Social Security. At
one point the article asserts that "Democrats know that if they are going
to find a way out of the minority, they must do more than simply block the White
House …. They will need to come up with their own idea for revamping Social
Security."
The
article provides no basis for this assertion. As a political matter, it is not
obvious that the Democrats would suffer from trying to oppose President Bush's
efforts to overhaul the country's most popular social program. Certainly, the
Republicans did not suffer in 1994 from obstructing President Clinton's efforts
to provide universal health insurance coverage.
As
a policy matter, certainly the problems facing Social Security do not rank high
by any objective standard. The problems facing the health care system are far
larger and more pressing. The same is probably true of the environmental threat
posed by greenhouse gas emissions. And, the United States will soon be faced
with a dire budget situation if it insists on military preeminence even after
China's GDP becomes larger, in approximately a decade.
If
there is some evidence that supports the assertion about the Democrats' need to
develop a policy for revamping Social Security, it should have been presented in
the article.
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Bush
May Back Curbs On Accounts
Jim VandeHei
and Jonathan Weisman
Washington Post,, February 1, 2005, Page A4
Six
Key Democratic Senators Oppose Bush Plan on Benefits
David E.
Rosenbaum and Richard W. Stevenson
New York Times,
February 1, 2005, Page A14
State
of the Union Focuses on Social Security
Richard W. Stevenson
New York Times, February
2, 2005, Page A1
These
articles report on aspects of the political battle over reforming Social
Security. All three articles include references to the date when the trust fund
is first projected to draw on the government bonds it holds (2018 according to
the trustees, 2020 according to the Congressional Budget Office). It is
important to recognize that, under the law, this date has no significance
whatsoever for Social Security.
When
the tax and benefit structure for Social Security was last altered in 1983, the
tax rate was set high enough to build up a large surplus, which was intended to
help pay for the retirement of the baby boom generation. The date when the
program begins to draw on this surplus, first by using interest on the
government bonds it holds, later by selling these bonds, is of no consequence
for Social Security.
As
the annual surplus of payroll tax revenue from Social Security decreases,
beginning in 2008, the federal government will have to make up this borrowing
elsewhere. The prospects of smaller annual surpluses from Social Security may be
a reason for the federal government to raise more money from income taxes or cut
other spending, but it is not a problem for Social Security.
It
is worth noting that Medicare is currently drawing on the bonds held by its
trust fund in order to meet its benefit payments (see Table II.B5 in the
Medicare Trustees' Report). This fact has (correctly) not been raised as an
issue affecting Medicare's solvency.
At
one point, the Post article reports that in order to eliminate the projected
long-term shortfall, President Bush plans to cut Social Security benefits
"at least for those who chose to set up private accounts." Plan 2 from
his Social Security commission (the plan that he indicated would likely form the
basis for any proposal he puts forward) called for benefit cuts for everyone,
regardless of whether or not they chose a private account. The cuts for people
choosing accounts would be even larger, offsetting most of the gains they could
hope to gain from these accounts.
The
Stevenson article also raises the possibility that private accounts proposed by
President Bush will leave workers better off than with the scheduled benefits
under the current system. There is no plausible scenario, consistent with the
Social security trustees' profit growth projections, which will allow these
accounts to compensate for more than a small fraction of the benefit cuts in the
plan cited by Bush as the basis for his Social Security proposal.
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In
Speech, Bush Sketches a Bold Agenda Domestic and Foreign Agenda
Richard W.
Stevenson and David E. Sanger
New York Times, February
3, 2005, Page A1
Introducing
Private Investments to the Safety Net
David E.
Rosenbaum and Robin Toner
New York Times, February
3, 2005, Page A1
Bold
Goal, Risky Path In Bush's Social Security Agenda
Todd S. Purdam
New York Times, February
3, 2005, Page A1
These
articles report on President Bush's plans for Social Security that were set out
in his State of the Union address. At one point, the Stevenson and Sanger
article reports the President's assertion that Social Security faces bankruptcy.
It also reports his comments that we should be concerned about the retirement of
our children in their 20s, since the program is projected to be unable to pay
their full benefits if no changes are ever made.
It
is worth noting that the projections of both the Social Security trustees and
the Congressional Budget Office show that the program will always be able to pay
higher benefits, even if nothing is done, than it would pay if the program
switched from wage indexing benefits to price indexing, as President Bush's
Social Security commission proposed. In other words, if this plan (Reform Plan
2, which President Bush cited as the basis for his Social Security reform
package) is implemented, our children in their 20s (including the president's
daughters) will get lower Social Security benefits than if we did nothing.
Both the Stevenson and Sanger article and the Rosenbaum and Toner article say
that the President's plan is motivated by a desire to take advantage of the
returns available in the stock market, which they expect to be higher than the
returns on the government bonds held by the trust fund.
While
the President and proponents of privatization are holding out the promise of
higher stock returns as a way to make their plan sound attractive, this
contradicts the numbers that they are using. Projections of stock returns that
are derived from the Social Security trustees' profit growth projections are
only slightly higher than the returns projected for government bonds. As a
result, on average holders of private accounts would just about break even,
after deducting administrative expenses.
The
Bush administration, and other proponents of private accounts, have consistently
refused to write down the set of dividend yields and capital gains that add to
the 6.5-7.0 percent annual stock returns they assume in their projections. If
they actually believed their projections, it would take only about ten minutes
to do this simple arithmetic exercise (see the "No Economist/Policy Analyst
Left Behind Social Security Test" [http://www.cepr.net/publications/ss_economist_test.htm]).
The
Stevenson and Sanger article and the Purdham article both note that the
President referred to 2018 as posing a problem for Social Security, the year
when the program is first projected to draw on the government bonds held by the
trust fund. Under the law, 2018 has no meaning whatsoever for Social Security,
just as 2004 (the date when Medicare first began to draw on its trust fund) had
no meaning for Medicare. If there is any problem repaying the bonds held by
Social Security and other creditors in 2018, it will be a result of the budget
deficits that the government has run up in prior decades. In other words, and
concerns about meeting obligations to Social Security in 2018 may provide good
reason to re-examine President Bush's tax cuts or war-related spending, but they
have nothing to do with Social Security.
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Bush,
On Road, Pushes Warning on Retirement
Richard W.
Stevenson
New
York Times,
February 4, 2005, Page A1
This
article reports on President Bush's efforts to promote his Social Security
privatization proposal. It reports that he told crowds that the system would be
"broke" in 2042 and that he warned young people of the bleak prospects
they face if the system is not fixed.
It
is worth noting that, according to the both Social Security trustees and the
Congressional Budget Office projections, the "broke" system will
always be able to pay workers a higher benefit than what they would receive
under Plan 2 put forward by President Bush's Social Security Commission. Bush
has cited this plan as the likely basis for whatever proposal he puts forward.
The
article also asserts that this is "as much an ideological struggle over the
relative roles of government and market forces as it about money." This is
not clear. President Bush's proposal could lead to tens of billions annually in
fees and commissions to the financial sector, which has been an important backer
of the president. His system would also likely prove to be far more beneficial
to higher earning workers, a group from which he draws substantial support.
Also,
President Bush's system still requires a very large role for the government,
since it will be requiring that workers save their money in government-regulated
accounts and then annuitize most or all of their savings. If his supporters
simply wanted less government, then they would leave the decision to save for
retirement up to individuals
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Q.&
A.
A Plan for
Social Security
New
York Times, February
3, 2005, Page A17
Benefit
Cuts Would Offset Contributions
Jonathan
Weisman
Washington
Post, February
4, 2005, Page A9
The
Times article presents a series of common questions about features of
President Bush's Social Security privatization plan and their answers. One
answer is incomplete. It says that if people decide to switch back from the
system of private accounts to the traditional Social Security system that they
could buy government bonds in their accounts, "which is what the
traditional Social Security system invests in." This implies that the
returns from money held in these accounts and invested in Treasury bonds would
be the same as the returns on money left in the traditional program.
This
is not true. When the person converted their account into an annuity, they would
lose approximately 10 percent in fees for the conversion. They would also have
to pay an annual administration fee on the bonds held in their account. The Bush
administration projects that this fee would be approximately 0.3 percent, which
means that the annual return on an account that held on treasury bonds would be
0.3 percentage points less than the return on money invested in the traditional
Social Security system. As a result of these additional costs, an account would
have to earn about 3.7 percent, before fees, in order for a worker to be as well
off as under the traditional Social Security plan. (The Post article also
ignores these fees in discussing the returns on the private accounts.)
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Bush
Shops Social Security Plan
Jim VandeHei
and Mike Allen
Washington
Post, February
4, 2005, Page A1
This
article reports on a series of speeches in which President Bush touted the
merits of his proposal for privatizing Social Security. It notes that the
President asserted that the accounts will be "money you can decide to leave
to whomever you want." This is not true. According to a "senior White
House official" who briefed reporters before the President's State of the
Union Address, workers would be required to buy an annuity with their accounts
that was large enough to ensure them an income that was above the poverty level.
For most workers this annuity will require all, or nearly all, of their
accounts. That means that President Bush's plan will leave them little or
nothing to pass onto their children.
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China
At
Forum, Leaders Confront Annual Enigma of China
Mark Landler
New
York Times, January
30, 2005, page A4
Lessons
for the American Empire
Anna Bernaser
New
York Times, January
30, 2005, Section 3, page 4
These
articles both discuss the projected growth of China's economy. Both articles
hugely underestimate the importance of China because they use an exchange rate
conversion measure of GDP. This measure takes China's GDP measured in its own
currency, and then estimates its GDP in dollars by converting the currency to
dollars at official exchange rates. By this measure, China's economy is
approximately 15 percent of the size of the U.S. economy.
Most
economists use purchasing power parity measures of GDP to compare national
economies. This measures the output of goods and services as if they sold at the
same price everywhere. By this measure, China's economy is at present
approximately 60 percent of the size of the U.S. economy. If it continues to
grow at the rate projected by the World Bank, China's economy will exceed the
size of the U.S. economy in approximately ten years. This should have great
importance for China's role in the world.
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Germany
German
Joblessness Rises As Benefits Are Reduced
Mark Landler
New
York Times, February 3, 2005,
Page C3
This
article reports on Germany's jobless rate hitting a post-war high in January.
The article repeatedly attributes high German unemployment to its labor market
protections. It is not clear that this explains Germany's unemployment rate.
Many countries with stronger welfare states, such as Denmark, Austria, and
Sweden, have much lower unemployment rates.
The
article does not discuss at all the restrictive monetary policies of the
European Central Bank (ECB). The ECB has consistently followed a much more
contractionary policy than the U.S. Federal Reserve Board. Virtually all
economists agree that the unemployment rate in the United States would be much
higher today, if it the Fed had been as contractionary as the ECB.
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