As the holder of an economics degree that WWB consulted for this by now blogosphere-famous post, I figured I ought to toss in my own two-cents. Unfortunately, Don Luskin already made all of the substantiative points I was going to make. The only thing I’d add is that it’s pitifully easy to beat the long-term bond rate. I can get a CD with a rate higher than three if I shop around a little. Further, bond interest rates are inversely proportionate to prices, which is something to keep in mind.

None of this matters, of course, to Peter DeFazio of the House (D-OR) and Meghann Cuniff of the ODE (PAPER-UO). DeFazio and Cuniff get so many things wrong it’s hard to know where to start. So I’ll start from the top of this lovely piece. ODE text in plain, my own in trixy italics.

President Bush’s plans for revamping the Social Security system, still being unleashed, have raised questions about the future of the system under the proposed changes and have sparked a flurry of debate across the country about the state of the current system.

Still being unleashed? Shouldn’t that be “unveiled” or “introduced” or any number of other less loaded verbs?

Bush touted his reform plan during his Feb. 2 State of the Union address, and this past weekend wrapped up a brief five-state tour dedicated to promoting the plan.

This paragraph is right.

Under Bush’s proposal, workers would have the option of diverting up to two-thirds of their payroll taxes into a private account that could be invested in stocks and real estate rather than contributing to the Social Security trust fund.

One, workers cannot divert up to two-thirds of the FICA to a private account. The FICA is 12.5%, half is paid by one’s employer. The proposal calls for up to four percentage points of the FICA into a personal account, which is about one third of 12.5%. It’s two thirds of one’s own contribution, true, but that’s not what the article says. I think we’ll cover the bit about the “trust fund” in a minute.

Created in 1935, the Social Security system was designed to provide an assured retirement fund to all workers. All employees and their employers in the United States pay a 6.2-percent tax that goes to the trust fund.

This entire sentence is factually false. First of all, as it was conceived by FDR in 1935, SSI wasn’t supposed to be a retirement benefit for all workers. It was originally designed as a Widows’ fund and for those of extremely long age. The life expectancy in 1935 was 64 years, benefits started at 65. The system never anticipated the growth of life expectancy, nor that the ratio of workers to retirees would fall so dramatically. Secondly, any surplus in the FICA is not “paid” into any trust fund. That money goes into the general fund and is used to prop up other spending. The “trust fund” is an accounting fiction, a tally of all the surplus money owed to Social Security by the rest of the federal budget. Plus a modest (3%) interest rate. The surpluses that Social Security has collected over the years are not anywhere, that money is long since spent.

The Congressional Budget Office predicts the trust fund will be depleted by 2018, leaving a pay-as-you-go system that, by 2052, will only have enough funds to provide about 73 percent of the promised benefits. The Social Security Board of Trustees predicts that will come in 2042.

Social Security is currently a pay-as-you-go system. Current workers pay for current retirees, the whole pay-as-you-go thing is why we’re having this big damn problem in the first place.

“With each passing year, fewer workers are paying ever-higher benefits to an ever-larger number of retirees,” Bush said in his Feb. 2 address. The administration claims the current system is in crisis, and the only way to salvage it is through reform.

Rep. Peter DeFazio, D-Ore., refuted this claim during a town hall meeting Saturday morning at the Eugene Water and Electric Board Training Center and Community Room, saying Bush’s proposal will do nothing to the Social Security system except “accelerate its depletion time.”

DeFazio held a series of town hall meetings Saturday and Sunday across Oregon to give citizens a chance to ask questions about Bush’s proposal and hear DeFazio’s own proposal for Social Security.

DeFazio’s plan for Social Security would lift the tax cap from $90,000 to $94,000, meaning anyone making less than $94,000 would have to pay Social Security taxes. The increase in taxes would be more than enough to cover the projected shortfall.

The main problem here is the last paragraph, the others are purely informational. Everyone, regardless of income, pays the FICA. The system is capped such that only the first $90,000 of income from anyone is subject to the tax. DeFazio’s proposal makes the first $94,000 subject to the FICA.

“The power elite does not like my idea,” DeFazio said in a phone interview.

More than 300 people attended the meeting and about 100 were turned away because the room was filled to capacity.

DeFazio fielded questions and urged attendees to write letters to the White House voicing opposition to Bush’s Social Security outlook, which he said is based on the most pessimistic of economic assumptions.

More like realistic assumptions that don’t rely on continued growth in immigration. Also, DeFazio doesn’t realize that the current promises are only going to get larger, in real terms, as SSI benefits are wage indexed.

DeFazio’s argument is that the Congressional Budget Office’s statistics do not signify a crisis, and the shortfall that has been projected to happen in about 40 years could easily be quelled with minor changes to the existing system.

DeFazio had various charts and a packet of handouts explaining his view on Bush’s Social Security proposal and detailing his own.

DeFazio said Social Security is a crucial program in the United States: “That’s why I want to, beyond a doubt, provide assurance that it will be there.”

Of course you do, gnome, but do you want to make Federal Employees subject to it? What’s that? No? Very interesting

Eugene resident Charles Fischer called a chart DeFazio used to explain the reduction in benefits that would occur under Bush’s plan misleading because it fails to take into account the amount of money that would be diverted to the proposed personal retirement accounts.

Fischer, an investment adviser with IMS Securities Inc. in Eugene, said in an interview that he feels both political parties have been misleading the public with distorted information about the Social Security system and the different reform proposals.

“We need to have a real honest debate and pull ideas from both parties,” Fischer said Monday.

Fischer said it is wrong to say the system is not in crisis when the trust fund will be depleted in less than 15 years. The assets needed once the trust fund is gone are not there, Fischer said — they only exist in the form of government “IOUs.”

“The federal government has taken all the money out and spent it,” Fischer said. “To claim that the money is there is wrong.”

DeFazio said the claim that the money is not there fails to consider the true meaning of a government bond.

Right, an investment professional misunderstand the nature of government debt…uhuh. Where is the goddamn money to pay back those bonds going to come from? A bond is an IOU, and if the government is going to have to start doing a major pay-down on bonds issued to SSI in order to keep the system afloat, the money is going to have go come from someplace. Eventually, that’ll be in the form of taxes, all sorts of taxes.

“If you believe the United States is still going to have a government, that the U.S. is still going to exist in the next 40 years, then there should be no doubt in your mind that Social Security will be there,” DeFazio said in a phone interview.

Actually, I have a lot of doubt that SS will be there by the time I retire, but I’m glad of that. Today’s young workers have virtually no expectations of the system, and those who will retire after 2052 are mostly children. Now is the time to reform while we can.

University political science professor Joel Bloom said the claim that a depleted trust fund will put the Social Security system into a crisis is an erroneous one that ignores reasonable thinking.

“If you can’t count on government bonds, then the entire national debt is worthless,” Bloom said.

In a way, that’s true, but it still ignores that the money to pay back the bonds has to come from somewhere. Read: general fund. Also, why in the hell is a poli-sci prof (an adjunct, at that) the one to be interviewed for this? Bloom does mostly public opinon and survey studies, and despite is work in that area I doubt he knows much about the sorts of projection models used by the CBO and SS Trustees. Why not somebody in Economics or Finance whose work is more related? Say, Mark Thoma about projections (easily the best econometrician at the UO, and that’s saying something because we’ve some good ones), maybe Chris Ellis or Peter Lambert about the public choice and taxation aspects? Why this guy?

DeFazio said the methods used by supporters of Bush’s proposal to explain the crisis the system will undergo are illogical and aimed at manufacturing a crisis when one does not exist.

Illogical? To use numbers and data? For shame!

Fischer said DeFazio’s plan to raise the tax cap is not an adequate way to tackle the problem and ignores the fact that if the economy does grow, wages will increase, which will subsequently increase Social Security benefits and accelerate the trust fund’s depletion rate.

That’s exactly right, with wage indexing real benefits grow over time. If the economy expands, so do SS benefits, which could make the system even more likely to become insolvent.

But opinions on the state of the system differ greatly, as some say that, with inflation rates and economic growth considered, the amount of benefits that will be available in the system will never fall below inadequate levels.

“Even without a trust fund in 2042, even with only getting 70-something percent of the promised benefits, you guys, your generation, is still going to get more money than your grandparents are getting right now, and that’s supposed to be a crisis,” Bloom said.

Oh, they quoted this guy because he’ll say the right thing. More money in what sense? Will 70% of promised benefits in the future be more or less than real benefits today? Well, that depends on a lot of factors, like the interaction of benefit growth and inflation. Will 70% of the future wage-indexed benefits be more than 100% of benefits today? I’ll tell you when I can borrow Prof. Bloom’s magical economic prediction ball. Furthermore, will the difference between what we pay in and 70% benefits in the future, in real terms, be more or less than the difference between our grandparents’ contribution and benefits in real terms? It’s goddamn impossible to tell. And people say Monetarism is “voodoo-economics”. Sheesh.

The President said last week his plan would not solve the Social Security system’s projected financial problems but added that doing nothing would do even more harm.

Fischer said many people have been disillusioned by the seemingly corporate control of the stock markets and are worried Bush’s plan for private, personal accounts would benefit investment advisers like himself. But Fischer said the accounts would be controlled by the government, leaving no room for investment advisers to benefit from them.

However, Bloom said the problem with investing money rather than contributing to the Social Security trust fund is that it will accelerate the fund’s rate of depletion and allow for risky investments that could jeopardize an individual’s retirement savings.

“It’s inherently more risky. Nobody knows what the stock market is going to do between now and four years from now,” Bloom said.

First of all, I trust a Certified Financial Planner a hell of a lot more than I trust some DC bureaucrat to run my retirement. I can meet, talk with, and explain my objectives to a Financial Planner. Can I call up the SS office in DC and talk to them about the P/E ratio of their funds? I thought not. That aside, so what if Financial Planners benefit from being able to help more people with their retirement? That’s a good thing, it both reduces the size of government and helps folks plan for the future. Furthermore, only a complete idiot will lose an entire portfolio barring fraud or complete meltdown of the financial system. Fraud from your Planner or Broker can be a problem, if you don’t use reputable servicers. Schwab, Fidelity, JP Morgan Chase, American Express, AIM, AIG, and a host of the other big names are about as likely to commit fraud as the Pope is to commit apostacy. Those institutions are highly regulated and watched by the most anal-retentive auditors ever to have sticks in their asses. Expecially after a bunch of foolish Enron employees invested their entire 401(k)s in Enron stock and lost their shirts. That’s a lesson, never put any of your own 401(k) contribution in own-company stock because the company match will be own-company anyway. So as long as you deal with reputable people and companies, barring complete economic collapse you’d have to be a moron to lose everything. Bloom is also only talking about stocks, there are other places to put money: Bonds (federal, state, municipal, corporate, international, etc), money market funds, CDs, mutual funds, futures, index funds, commodities…there are any number of investment options with varying levels of risk and reward. When you’re young, invest aggressively for growth; as you accumulate assets shift the approach to modest growth and asset maintenance; and when you retire concentrate on maintaining your assets exclusively.

The cost of setting up these private accounts is also up for debate. Critics have also questioned how private accounts will affect those dependent on Social Security for disability and survivor benefits. Bush has not said how diverting money from the fund will affect the amount of benefits available to those dependents, DeFazio said.

Private accounts will have beneficiaries like IRAs or 401(k)s do. If you die, your stated beneficiary will recieve the full benefit of your personal account in addition to the SS benefit that is still being paid by the government (You know, that 9.5 percentage points of the FICA everyone is forgetting to say is still going to go to traditional SS).

The debate over Social Security is expected to rage for many months as the President continues to unveil his plan. DeFazio vowed to hold more town hall meetings after Saturday’s meeting drew more attendees than any previous town hall meeting.

Fischer said he is hopeful both parties can forgo their political ideologies to examine the state of the system and form a game plan for the future.

“Instead of Bush out there supporting the PRAs at this point and DeFazio saying we don’t have a problem, we need to start from square one,” Fischer said.

Wow, the truest thing in the whole article comes at the very end, I am not surprised.

This entry was posted on Tuesday, February 8th, 2005 at 19:38 by Timothy and is filed under Things Only Tim Cares About. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.