Economic Reporting Review by Dean Baker
February 22, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
•
Global
Warming
• Energy
• The
Budget
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Outstanding
Stories of the Week
The
Bill's Lower Now. What About 4/15/11?
David Cay
Johnston
New
York Times,
February 13, 2005, Section 3 Page 27
This article looks at the prospect for future tax rates. It notes that President Bush's tax cuts are leading to large deficits, which will virtually guarantee higher taxes in the not distant future.
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Social
Security
Hastert
Cautions Bush About Social Security Plan
Mike Allen
Washington
Post, February
12, 2005, Page A5
This article reports on House Speaker J. Dennis Hastert's advice to President Bush on promoting his plan for Social Security. At one point, the article quotes Mr. Hastert as saying that Social Security "isn't going to work 12 to 14 years from now."
There is no projection that shows that Social Security will face any problems whatsoever in 12 to 14 years. The Social Security trustees report shows that the program will be able to pay all benefits for 37 years with no changes whatsoever, while the Congressional Budget Office (CBO) shows that the program will be able to pay all benefits for the next 47 years.
However, in 12 to 14 years (actually 13 to 15 years, using the trustees and CBO projections, respectively) Social Security will have to rely on the interest on its government bonds to pay full benefits. The implication of Mr. Hastert's statement is that he believes that the fiscal situation of the U.S. government is so dire that it will default on its debt and not pay the interest on these bonds to Social Security.
The
fact that the Speaker of the House apparently believes that the U.S. government
will default on its debt in the near future should have been given more
prominence. The U.S. government has never defaulted on its debt throughout its
history. The prospect of default would have enormous domestic and international
consequences.
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Sweden's
Take on Private Pensions
Alan Cowell
New
York Times,
February 12, 2005, Page B1
This
article reports on the Social Security system in Sweden, which includes
mandatory individual accounts, on top of its defined benefit system. The article
describes the system as being similar to the one advocated by President Bush.
Actually, President Bush wants to reduce the size of the guaranteed Social
Security benefit. The Social Security tax and guaranteed benefit provided by the
Swedish system are approximately one-third larger (the tax rate is 16
percentage points, with an add-on of 2.5 percentage points for the private
account) than the U.S. President Bush wants to cut the base of the U.S.
system further from 12.4 to 8.4 percentage points. There would probably be
little opposition from Democrats if he sought to make the guaranteed benefit
larger -like the Swedish system, and then added a mandatory account on top of
this guaranteed benefit. The main battle is over reducing the guaranteed
benefit, not having private accounts.
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Conservatives
Join Forces for Bush Plans
Thomas B.
Edsall
Washington
Post, February
13, 2005, Page A4
This article reports on the coalition that is behind the drive to privatize Social Security. At one point the article notes that the National Association of Manufacturers (NAM) is supporting President Bush's position on Social Security. It asserts that this is due to the fact that some of the group's leaders "believe that the economic health of their industries hinges on the long-term solvency of Social Security."
While these leaders may claim that they support privatization because they are concerned with the long-term solvency of Social Security, this is not a plausible explanation. Social Security is projected to be fully solvent for the next 37 years by the Social Security trustees and for 47 years by CBO. These projections show Social Security's long-term prospects to be much better than in prior decades when it required far more immediate action. During these prior decades, the NAM never made reforming Social Security a high priority.
The article also reports that many business groups fear an increase in Social Security taxes and that every percentage point increase "would cost corporate employers about $50 billion." While corporate lobbyists may claim that they are fearful of higher payroll taxes, it is questionable whether such fears really explain their actions on this issue. Virtually all economists agree that the full payroll tax (including the employers' contribution) comes out of wages; it would be striking if the NAM's leadership was so completely out of touch with economic theory.
Also
since the Social Security trust fund is projected to be fully solvent long into
the future in all projections, there is little prospect of any payroll tax
increase any time in the near future. In fact, if they were concerned about
taxes, business leaders should be concerned about the proposal by President Bush,
which would require trillions of dollars over the next three decades to finance
the transition to private accounts. Unlike Social Security revenue, which comes
from the payroll tax, the money to finance the transition would have to come
from general revenue, primarily personal and corporate income taxes. This
transition would present these businesses with the prospect of real tax
increases.
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To
the Debate Over Social Security, Add One More Variable: Immigration
David E.
Rosenbaum and Robin Toner
New
York Times, February
16, 2005, Page A18
This article discusses the potential impact that immigration can have on the solvency of Social Security. At one point the article asserts that the current rate of immigration is 600,000 legal entrants a year and 300,000 illegal entrants.
While this is the Social Security trustees' projected rate of immigration, actual immigration rates had been considerably more rapid. According to the 2000 Census data, the rate of immigration in the nineties had been approximately 1.3 million immigrants a year. If the trustees raise their assumptions on immigration rates, so that immigration is projected to be as rapid in the future (when the baby boomers retirement is projected to create a labor shortage) as in the nineties, it would eliminate approximately 10 percent of the projected shortfall in the program.
At
one point the article notes President Bush's plan to cut Social Security's
guaranteed benefit and asserts that "in theory the investment earnings [in
private accounts] would protect retirees' income." This is inaccurate. No
one has put forward a theory showing how investment returns from private
accounts can replace much or all of the benefit cuts likely to be included in
President Bush's plan. This is just an unsubstantiated claim by proponents of
privatization. The only projections of stock returns that have actually been
derived from the trustees' profit growth projections indicate that on average
returns should be just high enough to cover the administrative costs of private
accounts, providing little or no net gain to beneficiaries.
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Greenspan
Backs Idea of Private Accounts for retirement
Richard W.
Stevenson and Edmund L. Andrews
New
York Times,
February 17, 2005, Page A1
This article reports on Alan Greenspan's endorsement of President Bush's goals in restructuring the Social Security system. The article quotes Mr. Greenspan as saying that the current system "is not working."
It would have been useful to inform readers that Mr. Greenspan was the leading architect of the current system. He chaired the 1983 commission that designed the last major reform of Social Security.
At one point the article notes that only 85 percent of wage income is now subject to the Social Security tax, while the Greenspan commission set the cap at a level that covered 90 percent of wage income. It attributes this to the fact that the wage cap is price indexed, not wage indexed.
Actually
the cap is wage indexed, but it is indexed to the average wage. A lower portion
of wage income falls under the cap today than in 1983 because wages of high
income workers (those with wages over the cap) have risen more rapidly than the
average wage, while the wages of lower income workers have risen less rapidly
than the average wage. This upwards redistribution of wage income has caused the decline in the share of wages subject to Social Security
taxes.
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2
Top G.O.P. Lawmakers Buck Bush on Social Security
Richard W.
Stevenson and Robin Toner
New
York Times, February
18, 2005, Page A11
This
article reports on comments by House Speaker Dennis Hastert, and the Republican
majority leader Tom Delay, opposing any increase in the cap on the level of
wages subject to the Social Security tax. The article quotes Delay as saying
that eliminating the cap altogether only extends the solvency of the Social
Security program by 6 years. Later, the article asserts that "studies by
the Social Security Administration [SSA] suggest that even eliminating the cap
entirely would only delay the onset of the system's projected financial deficits
by six or seven years."
Both Mr. Delay and the article's assertion are wrong. According to a memo from
the chief actuary at SSA, removing the wage cap altogether on both taxable
wages and benefit payouts would make the program fully solvent until 2079, an
extension of 37 years from 2042, the date when the trust fund is currently
projected to be depleted.
The reference to six years presumably refers to the numbers of additional years
in which annual Social Security tax receipts would exceed annual benefit
payments. Under the law, this date has no meaning whatsoever for the solvency of
the Social Security program. By design, Social Security is currently running an
annual surplus of taxes over benefit payments, in order to build up a surplus to
help defray costs in the years after the baby boomers retire. The fact that the
program will eventually be running an annual deficit (and begin to draw on this
surplus) is not a problem for the program, although losing this source of
revenue could make it more difficult to fund other items, like President Bush's
tax cuts or military spending.
Proponents of privatization have claimed this shift from an annual surplus to an
annual deficit is a problem for Social Security in order to make the system's
problems appear more imminent. It is important to point out that this is not
true under the law.
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Global
Warming
Kyoto
Treaty Takes Effect Today
Shankar
Vedantam
Washington
Post, February
16, 2005, Page A4
Mixed
Feelings as Kyoto Agreement Takes Effect
Mark Landler
New
York Times, February
16, 2005, Page C1
These articles examine the prospects for containing greenhouse gas emissions as the Kyoto agreement goes into effect. The Post article includes an assertion from a White House spokesperson claiming that a Kyoto type agreement "would have cost 5 million jobs and $400 billion annually." This economic cost is approximately three times as high as the costs that were projected in studies financed by the coal and oil industries. These studies projected job losses that would reach a peak of around 1.5 million.
At one point the Times article notes that most emissions come from energy use by cars and homes, which it asserts are hard to control, because there are so many. Actually, the number of cars and homes does not pose any special problem. The standard method of discouraging emissions is to make them more costly. This can be done by taxing the use of polluting energy at the point of purchase (gasoline in the case of cars, or electricity for homes).
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Energy
Another
Energy Push Planned
Justin Blum
Washington
Post, February
13, 2005, Page A6
This article reports on Republican plans to push an energy bill through Congress. At one point it notes that oil prices have risen as high as $55 a barrel and claims that the Republicans hope to increase domestic energy production as a way to combat high prices.
It is implausible to believe that increased domestic production will have any significant effect on energy prices. Energy prices are set in a world market. In the case of the oil market, U.S. production is only about 10 percent of world production. If the energy bill led to a 10 percent increase in domestic production (a very large increase), then it would only increase world supplies by about 1 percent. Using standard assumptions about supply and demand elasticities, this increase would reduce prices by less than 3 percent. In other words, if the price of oil would be $50 in the absence of this increased supply, it might fall to $48.50 for the period during which this increased U.S. supply was available.
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The Budget
After
Bush Leaves Office, His Budget's Costs Balloon
Jonathan
Weisman and Peter Baker
Washington
Post,
February 14, 2005, Page A1
This article examines the run-up in budget deficits that would be implied for years after 2009 with President Bush's current budget proposals. It is worth noting in this context that neither the budget projections from the Office of Management and Budget or the Congressional Budget Office incorporate the impact of the trade deficit on the budget deficit.
The
trade deficit is supported by foreign purchases of U.S. financial assets (e.g.
stocks, bonds, real estate, etc.). Much of the income on these assets escapes
U.S. taxation when it is foreign owned. If the trade deficit stabilizes at 5.0
percent of GDP (it is currently 5.7 percent of GDP), it would imply a loss of
tax revenue of approximately $200 billion a year by 2015, or nearly 1.0 percent
of projected GDP.
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Costs
of Education Slope Upward Sharply
Valerie
Strauss
Washington
Post,
February 15, 2005, Page A10
This
article reports on President Bush's education budget for 2006 and the costs of
education more generally. It notes that President Bush is proposing a cut in
education spending of nearly 1 percent from the 2005 level. It would have been
more useful to report spending levels in inflation-adjusted dollars. Since
inflation has been approximately 3 percent over the last year, the cut in real
spending is equal to approximately 4 percent of 2005 spending. It also is
helpful to express spending as a share of the total budget rather than just in
dollar terms. The $56 billion requested for education spending in 2006 is equal
to approximately 2.2 percent of projected spending.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.