Social Security Reporting Review
January 18, 2005
This is the first installment of the Social Security Reporting Review (SSRR) which will appear every Monday. This review will function similar to ERR, but it will only chronicle stories concerning Social Security. You can sign up to receive SSRR and other CEPR e-newsletters at the CEPR Listserve Signup Page.
In This Issue:
• Outstanding Stories of the Week
• Other Stories on Social Security
Outstanding Stories of the Week
For Social Security, Trouble, Not ‘Crisis’
Miami Herald, January 12, 2005, Section A, Page 5
This article reports on President Bush’s attempts to portray the Social Security trustees’ projection of a Social Security shortfall in 2042 as a ‘crisis.’ It points out that President Bush and his allies are wildly exaggerating the potential problems facing Social Security, noting that, even if nothing is done, full benefits can continue to be paid to retirees for 37 years or more. The article also notes that these problems may never materialize, as they are based on rather pessimistic assumptions about future economic growth.
Is Social Security in Crisis?
Marketplace, January 13, 2005
Host David Brown interviews New York Times journalist Roger Lowenstein who has written the most recent cover story in the Times' Sunday Magazine on Social Security, which examines a number of the arguments that have been put forth to support the idea of a "crisis" in Social Security.
A Closer Look: Social Security
ABC World News Tonight, January 14, 2005
This segment reports on the debate about fixing Social Security. Correspondent Betsy Stark investigates whether the urgency that President Bush has invoked in discussing the need to fix Social Security is justified. Stark interviews Professor Alicia Munnell from the Center for Retirement Research at Boston College and Douglas Holtz-Eakin who is Policy Research Director at the Congressional Budget Office. Munnell explains that full Social Security benefits can be paid out until 2042, without any changes; and three-quarters of benefits paid out after 2042, according to the Social Security Trustees' projections, which President Bush is using.
Stark also challenges the President's claims that Social Security is going broke and his claim that there will be an $11 trillion shortfall in the system, explaining this number was calculated using an infinite time horizon. She also notes that according to the Trustees' numbers, by raising payroll taxes on workers and employers by just 1 percent each, the system could pay all its benefits for the next 75 years. She went on to note that since President Bush has said he will not raise taxes to strengthen Social Security, the Bush administration will likely propose a cut in benefits in their reform proposal.
Social Security reform
NPR Morning Edition, January 11, 2005
This segment features an interview with Peter Orszag of the Brookings Institution. Orszag is given the opportunity to explain that Social Security can pay full benefits until either 2042 or 2052, depending on whether you use the Social Security Trustees' or CBO numbers. At this point it will still pay out three-quarters of the promised benefits. Orszag highlights that the $10 trillion revenue shortfall cited by the Bush administration assumes an infinite time horizon, and not the 75-year planning period used by Social Security's actuaries. He also notes that this number has little meaning if not expressed as a percentage of GDP; and that Social Security's shortfall over the next 75 years, is lower than that incurred by the tax cuts and the Medicare prescription drug benefit.
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Other Stories on Social Security
Social Security: The Battle Is Joined
Time Magazine, January 10, 2005, Page 19
This article reports on how Republicans and their advocates will attempt to sell President Bush’s privatization plan to the American public. At one point, it says, “Because Democrats have given the term privatization a negative tinge, advocates prefer to call it personalization, emphasizing control and ownership rights.” It would be helpful to point out that the White House is not considering allowing individuals the kind of control over these accounts that readers would normally associate with personal ownership. Instead, Plan 2 from the President’s Social Security Commission, upon which the White House is shaping its proposal, would only offer workers a very limited choice of index funds, into which the government would place their money. Such funds would inevitably include companies that some workers would not freely choose to invest in due to activities they find objectionable, such as pornography, military operations, tobacco sales, or abortions. Also, the President’s plan would not allow workers to draw down money from their accounts prior to retirement.
Investment Pros See Bonanza; Social Security Proposal Would Add Billions to Investments and Fees
Ameet Sachdev and Lorene Yue; Mark Silva contributed to the article.
Chicago Tribune, January 9, 2005, Zone C: Business; Page 1
This article reports on the excitement President Bush’s plan to privatize Social Security has generated among Wall Street brokers and money managers, who could possibly gain billions of dollars in fees each year and who have met behind the scenes with key players in the White House and Congress. At one point, the article states that the opportunity to manage a portion of Americans’ payroll taxes “every year has investment professionals salivating at the potential financial bonanza.”
It would have been worth explaining in more detail the effect that the increased fees paid to Wall Street will have on workers’ retirement income. Administrative fees will be much higher under a privatized Social Security program than under the current system. Currently, less than 0.5 percent of every dollar paid out in benefits goes to administer the Social Security program. By contrast, in England and Chile, where they already have privatized systems, 15 cents of every dollar are eaten up by administrative fees paid largely to private firms. The President’s Social Security commission estimated that private accounts would have 5 percent administrative costs, almost ten times the current costs.
Untangling the Debate on Social Security
Richard W. Stevenson
New York Times, January 9, 2005, Section 4; Page 3
This article examines some of the key issues in the Social Security debate. When assessing whether President Bush's proposal for private accounts will improve the situation, it notes that proponents of private accounts point out that the stock market has historically generated higher returns than the government bonds held by the Social Security trust fund.
The returns in the stock market in the past are irrelevant. The relevant question is what returns the stock market will give in the future. (If economic growth is the same in the future as in the past, then Social Security would be fully solvent indefinitely, with no changes whatsoever.) None of the proponents of privatization has been willing to write down the set of dividend yields and capital gains that will produce the 6.5 percent annual returns that they are projecting for the stock market. This is an extremely simple exercise in arithmetic. The fact that proponents of privatization refuse to write down projections of dividends and capital gains suggests that they do not really believe the claims they are making about stock returns (see the "No Economist/Policy Analyst Left Behind Test").
Age Gap May Be Trouble for Bush
USA Today, January 11, 2005, Page 1A
This article reports on a recent USA TODAY/CNN/Gallup poll’s findings about support for President Bush’s privatization plan among different age groups of voters. In general, the poll found that voters over age 50 are opposed to privatization by 63% to 33% while those under age 30 support it by 55% to 42%. The article further notes that, while most older voters believe Social Security can pay them benefits, almost “two-thirds of those under 30 years old say they don’t think Social Security will be able to pay them any benefit when they stop working.”
The article should have noted that this belief is false, according to the Social Security Trustees projections (used by President Bush) or the more optimistic, non-partisan CBO's projections. According to either set of projections, even if no changes were made to Social Security, it would always be able to pay a benefit that is higher, in real (inflation-adjusted) terms, than workers receive today.
A Closer Look: Changing Social Security
ABC World News Tonight, January 11, 2005
This segment reports on President Bush’s plans for changing the Social Security system. Correspondent Robert Krulwich states: “When we pay our Social Security, we like to think that the government takes our money and puts it somewhere safe…But that is not what happens. …What actually happens is the government takes our Social Security money and puts it in a big pot and then spends it right away.…So, meanwhile, what's in your Social Security account? No money. Just IOUs.” This is misleading. The "IOUs" Krulwich refers to are U.S. Treasury obligations, which have never had a default in the history of the United States. The money taxed by Social Security therefore is "somewhere safe" -- as safe as any financial asset in the world -- and will be repaid, with interest, to the Social Security Trust Fund.
President Bush steps up campaign to revamp Social Security
NBC Nightly News, January 11, 2005
The report features the individual case of a 24-year old worker in Chicago who would see benefit cuts under the President’s proposal. This is followed by David John, who is identified simply as a Social Security analyst without mention of his position at the pro-privatization Heritage Foundation. Mr. John tells viewers that private accounts will recoup the cuts in benefits. This is not true; for a 24 year-old worker, only about a third of the benefit cuts could be expected to be replaced by the individual accounts. (See "Basic Facts about Social Security”).
Social Security Goals May Clash
Los Angeles Times, January 11, 2005, National Desk; Part A; Pg. 14
This article explores President Bush’s two competing goals in reforming Social Security; to enact cuts in benefits such that the system continues to be able to pay out benefits in full over the next 75 years, and to introduce private accounts. The two goals are in competition because most of those elected officials who favor one goal do not favor the other.
It would have been helpful to note that the projected shortfall is still quite distant, 2042 according to the Social Security trustees projections and 2052 according to the Congressional Budget Office’s assessment. Even after these dates the program would always be able to pay a higher benefit than is provided under President Bush’s price indexation formula.
It would also have been helpful to note that the potential returns from private accounts wouldnot be sufficient to make up for the benefit cuts that President Bush has proposed.
Social Security Crisis?
NPR Day to Day, January 11, 2005
Host Madeleine Brand interviews Ed Andrews of the New York Times. Andrews notes that a decreasing surplus in the Social Security trust fund (switching to a deficit after 2018) is worrisome because it will "place a steadily increasing burden on the overall government." It is important to note that this statement points out the problems resulting from current budget policies, which have created a large deficit in the general budget. At the moment, the Social Security surplus is helping to fill this shortfall.
Social Security’s Battle Over Values
Christian Science Monitor, January 12, 2005, USA Section; Page 1
This article highlights some of the issues and arguments in the current debate over Social Security privatization. At one point, the article suggests that the two sides of the debate differ primarily on which “values the federal government should espouse.” According to the article, those opposed to privatization schemes “generally see them as a threat to the collective protection offered by a big government program,” while privatizers see private accounts “as an encouragement to individualism, and a reduction in Washington’s power.” However, it is far from clear that this is actually the motivation of most privatizers or that private accounts in Social Security would even reduce Washington’s power or make the program smaller.
Under the proposals being considered by the Bush administration, the federal government would still mandate that workers save for their retirement, although it would give them the option to put their money into a set of funds that the government has chosen. Workers will not have control over this money beyond the ability to pick among a small number of index funds. Control over these funds will arguably increase, rather than decrease, the role of the government in the economy.
Bush Promotes Plan For Social Security
Michael A. Fletcher
Washington Post, January 12, 2005, Page A4
Bush Presses His Argument for Social Security Changes
New York Times, January 12, 2005, Page A16
These articles report on President Bush’s efforts to promote his plan to partially privatize Social Security. At one point the Times article asserts that even without changes, Mr. Bush’s critics say, the system would be able to pay three-quarters of promised benefits four decades from now.
While critics of President Bushs plan do make this point, it is actually the Social Security trustees who make this projection. Four of the six Social Security trustees are political appointees of President Bush (the secretaries of Health and Human Services, Labor, Treasury, and the Social Security Commissioner). It is inaccurate to describe these people as critics of President Bush.
The Post article reports that President Bush commented on the fact that African-American men have shorter life expectancies than white men. According to the article, he claimed that his plan would therefore be a boon to black men, since they would be able to pass along their private accounts to their children.
It is worth noting that it is impossible to both ensure a stable retirement income (like the inflation-indexed annuity provide by Social Security) and to pass along accounts to heirs. If retirees are not required to turn their accounts into annuities, then there is no guarantee that they will have a decent income throughout their retirement. If people do live long lives, then they may have little or no money left in their accounts to support them in their last years.
More importantly, it would have been worth noting the implication of President Bush’s assessment. While African-Americans do have shorter life expectancies than whites at present, Social Security policy is designed for 30 to 40 years in the future. Effectively, President Bush has assumed that nothing will be done during this period to eliminate the racial inequalities in life expectancies. Instead, he is trying to adjust retirement policy to accommodate these inequalities, apparently accepting that this inequality will persist for many decades into the future.
Social Security: Bush Proposes Reform
ABC Good Morning America, January 12, 2005
This segment reports on President Bush’s plans for changing the Social Security system. Correspondent Claire Shipman has guest Michael Tanner, a prominent advocate of privatization, calculate the Social Security benefits of the Wilson family, where the parents are 20 years off from retirement. Shipman asserts that “One thing everyone agrees on, the Social Security system as it exists now won't be able to afford those payments for long after the Wilsons retire.” Actually, the Social Security trustees project that the system will be able to pay full benefits until 2042 with no changes whatsoever, 17 years after the Wilsons retire. The Congressional Budget Office projects that the program will pay full benefits until 2052, 27 years after the Wilsons retire.
Shipman then explains that the President’s Social Security reform proposal may entail benefit cuts and private investment accounts, followed by Tanner’s claim that the private accounts would recover the amount lost in benefit cuts. Shipman provides Tanner’s calculations for the Wilson family that corroborate this statement, which were made assuming only a small investment in a private account and a modest return. The exact investment amount and rate of return are, however, not provided to the viewer. In fact, there is no rate of return, consistent with the trustees projections and current stock valuations, that would compensate for President Bush’s proposed benefit cuts, even if all Social Security taxes were invested in a private account (see the "No Economist/Policy Analyst Left Behind Test").
Accounts Hold Risks, Rewards
Kathy M. Kristof
Los Angeles Times, January 12, 2005, National Desk; Part A; Pg. 14
This article answers a series of questions about how the creation of private investment accounts under Social Security would affect the typical American worker. The article correctly points out that a new system of private accounts would put workers at risk of losing money and earning lower benefits than under the current system.
It would have been helpful to note that returns from private accounts would be slightly diminished by the administrative costs of a system of individual accounts. Workers will also have to pay additional money to cover the costs of having their account turned into a lifelong flow of income like Social Security.
Report on Social Security
Fox Special Report with Brit Hume, January 13, 2005
This segment reported on a speech promoting privatization by Vice-President Dick Cheney. At one point, the Vice-President was quoted saying that “the system is on a course to eventual bankruptcy.” It would have been useful to note that the Social Security trustees project that it can pay full benefits through the year 2042 and that it will always be able to pay a higher benefit than would be provided under President Bush’s price indexation proposal.
the segment quoted the Vice-President warning that delay in diverting payroll
taxes into personal accounts would make it increasingly more expensive to
eliminate projected funding shortfalls. It would have been helpful to note
that private accounts do nothing to alleviate the projected shortfall; this is
done by benefit cuts. Also, since the return on private accounts, after
deducting administrative expenses, will be virtually identical to the return on
the government bonds currently held by the trust fund, they will not help
alleviate the impact of these benefit cuts to any significant extent.
Overhauling Retirement Is Worth Risk, Cheney Says
New York Times, January 14, 2005, Page A14
This article reports on a speech by vice-president Dick Cheney in which he argued that privatizing Social Security was both desirable and necessary. At one point it notes that Mr. Cheney compared a 2 percent return that he attributed to Social Security with a 6.5 percent rate of return on investment for investing in the stock. Cheney claimed the $1000 invested at the former rate would produce $60,000 after 40 years, while $1000 invested at the latter rate would yield $160,000.
It is important to note that returns on Social Security are depressed by the need to pay for the current generation of retires. If Social Security revenue is instead diverted to private accounts, then it is necessary to pay for current beneficiaries with other taxes. The return on these other taxes is minus 100 percent, since the workers who pay them get none of this money back. It is also worth noting that Mr. Cheney’s 6.5 percent return calculation assumes that all funds are invested in the stock market all the time. Virtually all analysts, including President Bush’s Social Security commission, assume that accounts will hold a mix of stocks or bonds, with a 50/50 or 60/40 ratio being the standard mixes. Such a mix substantially lowers the rate of return.
Also, the only reason that Social Security is projected to face a shortfall is that the trustees project that future economic growth (and profit growth) will be far lower in the future than in the past, averaging just 1.5 percent annually when measured against the consumer price index. In the past, the growth rate has averaged 3.5 percent. Stock return projections derived from this profit growth projection, and based on the current price to earnings ratio in the stock market are just 4.5 percent (see the "No Economist/Policy Analyst Left Behind Test"). When an accurate projection of stock returns is used, individual accounts provide approximately the same return as the bonds currently held by the Social Security trust fund, after netting out administrative costs.
The article also notes that Mr. Cheney referred to a shortfall of $10.4 trillion in Social Security over the infinite horizon. While it points out that the bulk of this shortfall occurs well beyond the 75-year planning period for the program, it would also be useful to put this number in context. Over an infinite horizon, the projected shortfall is equal to 1.2 percent of GDP. By comparison, President Bush’s tax cuts are equal to approximately 2 percent of GDP or $17.3 trillion.
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