Bush Plan Cuts Social Security, Without Much "Ownership"
Proposed Cuts in Benefits Dwarf Potential Gains From Private Accounts
Statement by Dean Baker and Mark Weisbrot
For Immediate Release: November 9, 2004
Contact: Debi Kar, 202-387-5080
Dean Baker: 202-332-5218
Mark Weisbrot: 202-746-7264
The day after George W. Bush was declared the winner of the 2004 Presidential
election, he announced plans to move forward with a proposal to partially
privatize Social Security.
“To the President, “ownership” means losing 40 percent of your Social
Security benefits, and getting a few thousand dollars in a private account in
exchange. Most people would prefer a secure retirement to that sort of
ownership,” says Dean Baker, economist and co-director of the Center for
Economic and Policy Research.
“If the public realized the truth about Social Security – that the
program is fundamentally sound, and that there are no big gains to be had by
investing Social Security money in the stock market – there would be little
public support for privatization,” added Baker.
Bush’s proposal will phase in benefit cuts so that younger workers will see
larger cuts. As an example, a worker who is 50 today would see a cut of about 7
percent in the benefits they are scheduled to receive, whereas a worker who is
30 today would see a cut of approximately 25 percent in their benefit. A worker
who is currently 20, and can expect to retire at age 65 in 2050, would lose
approximately $200,000 in benefits under the most widely cited proposal from
President Bush’s Social Security Commission.
These benefit cuts are supposed to be offset by investing Social Security
taxes in the stock market. But the 6.5 percent rate of return on stocks
projected by the President’s Commission is mathematically impossible given
current price to earnings ratios and projected profit growth. The stock return
consistent with the price to earnings ratio and the Social Security trustees’
profit growth projections is just 4.5 percent, not far above the 3.0 percent
return projected for the government bonds held by Social Security. Simple
arithmetic shows there is no bonanza from investing Social Security money in the
stock market. Increased costs from administering these new individual accounts
will further diminish this slightly higher return.
Furthermore, Bush’s proposal rests on the premise that the current Social
Security system is broken and needs to be fixed. This is false.
According to the Social Security Trustees' Report, the standard source for
economists and the Bush Administration, the program can pay all promised
benefits without any changes for the next 38 years. Beyond that, it could still
pay a benefit larger (in real, inflation-adjusted dollars) than beneficiaries
enjoy today – indefinitely.
Dean Baker and Mark Weisbrot are co-authors of Social
Security: The Phony Crisis (2000, University of Chicago Press). See www.cepr.net
for more information.