Economic Reporting Review

May 22, 2000:

Social Security Plans; Interest Rate Hikes; China
Trade

By Dean Baker

Social Security | Interest Rates | Trade | Patents | The Euro | Outstanding Stories 


SOCIAL SECURITY

"Bush Versus Gore Means an All-Baby-Boom Race" 
Katharine Q. Seelye 
New York Times, May 14, 2000, Section 1 page 22 

"Social Security Reform Issue Becomes Defining Issue" 
Dan Balz 
Washington Post, May 15, 2000, page A1 

These articles examine the two major party presidential candidates' approaches to Social
Security. Both articles seriously misrepresent the finances of the program, presenting a picture
that is far worse than is shown by the Social Security trustees report. 

The Times article asserts that "the government predicts that the trust fund will begin paying out
more than it takes in by 2015." The Post article similarly claims that program's "finances will
begin to deteriorate in about 15 years." According to the most recent trustees report, the
program's income will exceed its scheduled benefit payments by $270 billion in 2015. 

The statements in the article presumably refer to the fact that in 2015, the benefits paid by
Social Security will exceed the amount collected in Social Security taxes; the surplus in that
year is entirely attributable to the interest on the government bonds held by the trust fund.
However, the relationship between the tax collected for the program and the benefits paid out
has absolutely no meaning for the health of the program. The only reason the fund built up a
surplus was to cover this anticipated shortfall, so it is not a problem for the program that it is
dependent on using this surplus. 

By focusing on the date 2015, these articles are legitimizing a trick that many politicians have
employed to scare people about Social Security. When it is convenient, they speak as though
there is no separate Social Security trust fund, but at other times, their argument that the fund
could ever go broke depends on the existence of a separate trust fund. 

The basic logic here is straightforward. If the Social Security trust fund has any meaning as a
separate accounting entity, then the source of its revenue is irrelevant. If the fund doesn't have
meaning, then it is absurd to say that the program will ever go broke. In this case, Social
Security would be just another program that is projected to cost more in the future, like
Medicaid or criminal justice. If there is no separate fund, there is nothing, other than the
Federal government, which could ever go broke, just as the criminal justice system could never
go broke. 

The articles include several other comments that are wrong or misleading. For example, the
Times article states that "without a major fix, the system could go broke by 2037." The Post
article similarly warns of bankruptcy by that date. These comments are misleading, because
even if no changes were ever made, the projections show that the program could still pay out
benefits that are larger, in today's dollars, than an average retiree currently receives from Social
Security. While the projections do show that there will be a shortfall after 2037, the notion that
the program would ever be completely broke, and unable to pay a significant benefit, has
absolutely no foundation. It is unfortunate that these articles present the situation in this manner,
because polls consistently show that many people wrongly believe that the fund will not be able
to pay them any benefits. 

The Post article includes several other significant misrepresentations. It implies that the main
problem of the program is the demographic bulge associated with the baby boomers. In fact,
the baby boomers' retirement will be largely covered by the surplus the fund is currently
accumulating. The real long-term problem facing the program is simply that people are
projected to live longer. Longer lives mean longer retirements, which cost more money. 

"Bush Proposal Ventures Into Financial Unknown" 
Glenn Kessler 
Washington Post, May 16, 2000, page A6 

This informative article analyzes the Social Security proposal put forward by presidential
candidate George W. Bush. At one point, it notes that Bush's aides defended their projections
on stock returns by saying that the Social Security trustees economic predictions were too
gloomy. It is worth noting that if his aides believe the trustees economic predictions are overly
pessimistic, then they also must believe that the program is even healthier than the latest trustees
report indicates. 

"Bush Maps His Changes For Social Security" 
Dan Balz 
Washington Post, May 16, 2000, page A1 

"Challenges to Bedrock of Retirement" 
Richard W. Stevenson 
New York Times, May 16, 2000, page A18 

"Gore Denounces Bush Social Security Plan as Too Risky" 
James Dao and Alison Mitchell 
New York Times, May 17, 2000, page A18 

"Social Security Debate Framed in Generalities" 
Jonathan Fuerbringer 
New York Times, May 17, 2000, page A18 

These articles discuss George W. Bush's proposal to replace a portion of Social Security with
individual accounts. They all imply that it will be possible to get significantly higher returns in the
future in the stock market than in government bonds. There have been several papers by
economists which show that, given current stock valuations and the growth projections from
the Social Security trustees, it will not be possible to get significantly higher returns on stock
than on government bonds. (See, e.g., "Saving Social Security With Stock: The Promises Don't
Add Up," by Dean Baker, Century Foundation, 1997; May 15,1999 letter to Martin Feldstein,
by Dean Baker, http://www.cepr.net/Social_Security/letter_to_feldstein2.htm ; and "What
Stock Market Returns to Expect for the Future?" by Peter Diamond
http://www.bc.edu/bc_org/avp/csom/executive/crr/ib2.htm . ) No economist has been able to
demonstrate how the stock market will be able to provide its historic rates of return in the
future, given current stock valuations and the low projected growth rate for profits in the Social
Security trustees projections. In the absence of any evidence to support this contention, it is
irresponsible for these articles to suggest that high future stock returns are a possibility. 

"Gore Has Not Bought Stocks for Decades" 
Katharine Q. Seelye 
New York Times, May 17, 2000, page A18 

This article discusses the extent to which Vice President Al Gore has held his savings in stock,
implying that this bears some relevance to his views about putting Social Security money in the
stock market. There is no obvious connection between the two. Gore has earned Social
Security benefits, and presumably also a sizable government pension as well. This would be
income that he could rely upon in retirement. If, in addition to this income, he chose to place a
portion of his money in the stock market, it would not imply that he considers it appropriate to
replace his core retirement income with stock market investments. This article misrepresents
the nature of the debate over Social Security by implying that individuals' decisions on how to
hold their savings, when they can rely on a core Social Security benefit, imply the best way to
invest the money that provides the basis for this core benefit. 

"Gore Touts Social Security Plan" 
Glenn Kessler 
Washington Post, May 18, 2000, page A6 

This article analyzes Vice President Gore's proposals for Social Security. At one point it
examines the logic of having a separate fund that is designated to pay for Social Security. An
important distinction that it doesn't mention is that the money paid into the fund directly from
payroll taxes comes disproportionately from low and moderate income workers, since the
payroll tax is very regressive. By contrast, money to repay bonds held by the fund or additional
contributions from general revenue will be derived mostly from progressive personal and
corporate income taxes. 

This distinction will make an enormous difference to future generations of workers. The
effective income tax rates for the poorest and second poorest quintiles are negative 6.9 percent
(due to the earned income tax credit) and 1.7 percent, respectively. By contrast, their effective
payroll tax rates are 7.7 and 9.6 percent, respectively. The richest fifth of households pays an
effective payroll tax rate of 7.7 percent, but a personal income tax rate of 16.4 percent and a
corporate income tax rate of 3.3 percent (State of Working America 1996-97, Lawrence
Mishel, Jared Bernstein and John Schmitt, 1996, M.E. Sharpe, p. 116). In short, the source of
future revenue for Social Security will make a huge difference. 

The article also includes a comment from Rudolph G. Penner that the taxes needed to meet
Social Security's obligations will be painful for future generations. It is worth noting that the
projected shortfall is less than 1.0 percent of national income over the 75-year projections
period. Even with extremely pessimistic projections, workers on average will have incomes that
are 35 percent higher in 2030 than today. 

If their income is reduced from this level by approximately 1.0 percent due to higher taxes, it is
not apparent that it would be especially painful. As a result on increasing wage inequality, the
typical worker saw a 5.5 percent decline in real hourly wages from 1979 to 1997. This means
that the pain Penner fears from higher Social Security taxes is less than one-fifth as large as the
pain many working families experienced due to rising wage inequality over the last two
decades. 

More about Social Security. 

[Top] 


INTEREST RATES

"Hints of New Inflation May Draw Sharp Fed Reaction" 
Richard W. Stevenson 
New York Times, May 15, 2000, page A15 

This article examines the factors that are likely to affect the Federal Reserve Board's decision
on interest rates at its meeting this week. At one point it refers to "a flood of business
investment that has allowed the United States to reclaim its position of economic
pre-eminence." It's not clear what measure the article is applying to make this determination.
Productivity growth in the United States has not generally exceeded the productivity growth in
western Europe through most of the '90s. Furthermore, the United States is running a record
trade deficit of 3.5 percent of GDP, which suggest that U.S. goods are faring rather poorly in
international competition. 

The article also suggests that the Alan Greenspan believed that the economy may be able to
grow faster than was generally recognized, because actual productivity growth was more rapid
than measured productivity growth. This view is wrong. If productivity growth was being
undercounted, then GDP growth was also being undercounted by almost exactly the same
amount. 

For example, if productivity growth was being reported as 1.0 percent annually when it was
actually 2.0 percent, this would imply that actual GDP growth was approximately 1.0
percentage point higher than reported GDP growth. So, if GDP growth had been reported as
2.5 percent, with correct measurements it would be reported as 3.5 percent. 

The article also includes an important factual error. It comments that "the Fed has not shied
away from raising interest rates during presidential campaigns--it did so through much of
1992." Actually, the Fed cut interest rates through 1992. The Federal funds rate, which it
directly controls, was 4.0 percent at the start of 1992, and had fallen to 3.0 percent by election
day. 

[Top] 


TRADE

"Snapping Up Chinese Goods Despite Qualms on Trade Bill" 
Joseph Kahn 
New York Times, May 17, 2000, page A1 

This front page article tries to portray the shopping habits of consumers as being in
contradiction to their views on the bill that would establish permanent normal trading relations in
China. The article reports on several Wal-Mart customers' reservations over U.S. trade with
Chinese as they purchase products made in China. 

The contradiction that the article implies does not exist at all for two reasons. First, the bill
before Congress is not addressing whether the United States should trade with China, it is
addressing the rules that govern this trade. It would make as much sense to claim a
contradiction exists if someone eats food and at the same time favors the removal of agricultural
subsidies. 

Second, it is widely recognized that consumers, left with their individual choices, would buy
large amounts of Chinese goods. This is apparent to anyone remotely familiar with trade data.
It should not have been necessary to visit Wal-Mart to realize this fact. 

From the standpoint of the individual consumer, it is entirely to rational to purchase an item
produced in China, even if he or she strongly objects to the conditions under which the item
was produced. Their individual decision can have no possible impact on the continuation of the
practices in China to which they may object. The point of collective action through government
is to change the logic that underlies this decision. 

For example, most people would not voluntarily agree to pay a portion of their income to the
government; nonetheless they support mandatory taxation. Consumers may collectively agree
that they would be willing to pay somewhat more for clothes or toys if they knew that they
were produced by workers who enjoyed basic human rights. 

There is no apparent news content to this article. Its placement on the front page less than a
week before the vote on permanent normal trading relations with China is a peculiar editorial
decision. 

"Deal Brews to Give Fairer Deal to Farmers" 
John Burgess 
Washington Post, May 15, 2000, page E1 

This informative article examines the growth of coffee purchases in the United States that are
subject to "fair trade" rules which guarantee a certain price to the growers. At one point, the
article comments that "a 25-cent premium per cup can more than make up for the extra cost of
fair-trade beans." According to the article, the fair-trade price for coffee is currently 31 cents a
pound above the world market price. It is possible to get more than fifty cups from a pound of
coffee, which suggests that a premium of just 1 cent per cup should be sufficient to cover the
higher price of fair-trade coffee. 

More about trade. 

[Top] 


PATENTS

"Sharing of Profits Is Debated as the Value of Tissue Rises" 
Gina Kolata 
New York Times, May 15, 2000, page A1

This informative article examines some of the issues surrounding the ownership of genetic
material. It reports that many volunteers have tried to gain a portion of the royalties when
genetic material they provided was subsequently patented. The article allows the basic issue to
be framed by a law professor who asserts that "the fact is that we rely on the private sector to
develop diagnostic and therapeutic products, and the private sector is profit driven." 

This assertion is extremely misleading. Most bio-medical research is funded by universities,
private foundations and charities, or by the federal government. Less than half is financed
directly by the pharmaceutical industry, where it can be assumed that profit is the main
motivation for research. This article raises several ethical, legal and economic problems that
arise from patent supported research in this area; most importantly, that volunteers who are
willing to take part in experiments to advance medicine may not be willing to take part in
experiments that could lead to large monetary payoffs to the researchers. The problems
discussed in this article suggest that patents may be an inefficient way to support bio-medical
research. 

[Top] 


EURO

"The Fed, in a Supporting Role for the Euro" 
Jonathan Fuerbringer 
New York Times, May 14, 2000, Section 3 page 8 

This article repeats the assertion that the relative value of the dollar and the euro depend on
their relative growth rates. There is no economic theory that would support this claim. Investors
place their money based on expected rates of return, which have no direct relationship to
economic growth. Placing money in a nation's currency simply because it has a high rate of
growth would be like investing in a city because they have a winning football team. (See ERR,
5/15/00.) 

More about Europe. 

[Top] 


OUTSTANDING STORIES OF THE WEEK

"Pesticide Coalition's Text Enters House Bill" 
George Lardner Jr. and Joby Warrick 
Washington Post, May 13, 2000, page A1 

This article reveals that a bill weakening Environmental Protection Agency's enforcement
powers was drafted by lobbyists for pesticide manufacturers, agricultural organizations and
food processors. 

"Levitating Earnings: An Act or a Fact?" 
Gretchen Morgenson 
New York Times, May 14, 2000, Section 3 page1 

This article reports on a variety of questionable accounting practices, such as including portfolio
gains, which corporations are using to increase reported profits. 

[Top] 


Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR. 

ERR is edited by Jim Naureckas. 


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