Thursday, February 17, 2005

Will Americans Gamble on Bush's Social Security Privatization Plan? When Given The Facts, Polls Suggest The Answer is "No."

Do you feel lucky?

Let's take a close look at the proposal President Bush’s Social Security Commission put forward in 2001, which the president has said is a "good place to start the debate." (Note: this is Bush-speak for "we're doing it this way.")

According to Social Security Administration actuaries, Social Security benefits currently equal 42 percent of the earnings of an average wage-earner who retires at 65. This percentage is slated to decline to 36 percent over the next two decades, as Social Security’s “normal retirement age” rises to 67. It would remain at 36 percent thereafter.

Under the proposal the president's commission advanced, Social Security benefits would, by 2075, equal only 20 percent of an average wage-earner’s pre-retirement earnings, and the percentage would drop further in subsequent years.

Now, to be fair, under the commission's plan, Social Security benefits would be supplemented by money from the retiree's private account.

How large would that supplement be? That would depend on how well the retiree invested. If the markets are booming, like in the 1990s, a retiree would likely be very happy. But if the markets are stagnant -- such as over the past two or so years -- a retiree might be very broke.

That potential inequity really hasn't been addressed. Would there be a baseline -- a government supplement to the private account supplement -- available for those who retired during a lean period for the equity markets?

***

You don't hear a lot about the benefits that would be lost under the commission's plan. As factcheck.org pointed out, during Bush's State of the Union address, "Bush ... made his proposed private Social Security accounts sound like a sure thing, which they are not. He said they 'will' grow fast enough to provide a better return than the present system. History suggests that will be so, but nobody can predict what stock and bond markets will do in the future."

The administration says a conservative mix of stocks, corporate bonds and government bonds would return 4.6 percent, even after inflation and administrative costs. And the administration also figures that private accounts would need to generate only a 3 percent rate of return to beat what Social Security provides.

But the problem with average returns is that it takes into consideration highs and lows -- years when the markets produce double-digit returns, and years when the markets produce negative returns. And that takes us back to the potential inequity that could occur, depending on when a person was to retire.

***

During the State of the Union address, and in his nine (and counting) stump speeches thereafter, Bush has used the word "bankruptcy" to scare up support for his privatization plan.

BUSH: By the year 2042, the entire system would be exhausted and bankrupt.

There are two official projects, one by the Social Security Administration and one by the Congressional Budget Office. As noted on JABBS and elsewhere last month (http://jabbs.blogspot.com/2005/01/bush-administration-plays-politics.html#), the Bush administration has asked the usually non-partisan SSA to tout the need for privatization. Perhaps because of that, the SSA projection is more pessimistic than the CBO projection.

The president has used the SSA figures, which calculate that the system's trust fund will be depleted in 2042. After that, the system would have legal authority to pay only 73% of currently promised benefits, with the figure declining to 68% of benefits by 2075. (The CBO projects depletion in 2052, and a reduction to 78% of benefits thereafter.)

It should be noted that when the president uses the SSA figures, he is assuming a moribund economy over the next 37 years. But when he touts privatization, he assumes a stronger economy for that same time period. But I digress ...

As factcheck.org wrote on Feb. 3: "The President did not specify what he would do to fix the problem. He again urged creation of private Social Security accounts. But those would be of no help whatsoever in shoring up the system's finances, as acknowledged earlier in the day by a senior Bush administration official who briefed reporters on condition of anonymity."

According to that official: "the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government."

But "net neutral effect" is really over the long-term. In the short-term, the administration projects it will borrow $754 billion through 2015 to finance the initial phase-in of the accounts, and much more thereafter. The liberal Center on Budget and Policy Priorities -- which opposes Bush's proposal -- projected that $4.5 trillion would be required to finance the first 20 years of the accounts after they start to be phased in in 2009.

One cost not mentioned by Bush is that the federal government would administer the personal accounts for a fee, which administration officials have said would be about 30 cents per year for every $100 invested.

***

Bush has not yet proposed anything specific. But his strong advocacy of private accounts -- the crux of his commission's suggestions -- make it clear what path he has chosen for the country.

Other plans have been advanced, by the Democrats and by various economists, but the media has been squarely focused on what the president has been saying. I question what would happen if the average American understood all the details of what will likely be Bush's proposal.

A Feb. 10 report in The Washington Post, referencing two polls that sought to answer that question, found that a solid majority rejected the idea of decreased retirement benefits. About half of those who said they supported privatization "wrongly believed that the costs of creating personal accounts would be negligible."

"While 56 percent said they support a plan for individual investment accounts, more than half of those said they would be less likely to do so after hearing the estimate. More than four in 10 supporters wavered when they heard that personal accounts would not, by themselves, reduce the financial problems facing Social Security," the Post reported.

Seems Bush has his work cut out -- the reason for his multi-city tour to talk up the privatization plan. The problem he faces is clear: the more facts people have about the privatization plan, the less people like it.

I guess some people just don't like to gamble.

7 Comments:

Anonymous Anonymous said...

Shocking: The Washington Post, a liberal dishrag, found that most people rejected Bush's Social Security Plan. That's why I get my financial news from the Wall Street Journal,which reported Thursday that Greenspan supports the idea of private accounts.

10:11 AM  
Anonymous joe said...

It's not mutually exclusive to say that Greenspan supports private accounts, and Americans, upon hearing enough information, do not.

10:41 AM  
Anonymous Anonymous said...

Isn't it shocking (maybe it isn't) that the conservative poster above -- rather than argue the merits of the facts -- sidesteps to take a swipe at The Washington Post?

Typical of conservatives. When in doubt, confuse the issue.

10:42 AM  
Anonymous Anonymous said...

This comment has been removed by a blog administrator.

2:05 PM  
Anonymous Anonymous said...

once again, everyone misses the point. you cant rely on polls here--pure politics once again. People need the facts to be sure but they clearly do not have them at this point. Neither does Jabbs or anyone else for that matter. No clear plan has been put forward, only bits and pieces of ideas of plans. This is a complicated topic and polls try to simplify. Doesnt work.

You ask an older person whether he believes in making changes and he or she will say no if he/she has a brain. why-because the system will still work for them. Do a poll of 20 year olds (assuming they understand anything about this) and yo umay see a different result.

Of course, the method in which the question is asked also determines the answer.

anyway, above you suggest that investing in private accounts could result in being broke. under what scenario---the collapse of america? take any considerable period of years, put most investmnts in something "safe", and explain how you could lose all your money. impossible or close to it. and i say that not being in favor of private accounts. but that is pure nonsense.

i am waiting for someone to put out a comprehensive plan rather than a used car salesman pitch. and right now both Bush and the dems are used car salesman.

3:27 PM  
Anonymous Anonymous said...

you love to say it is a conservative method to not argue the merits. okay, and leaving whether or not conservatives ignore facts, explain your facts. doubt you can clearly give them to me. because you dont know them either. you are working in a vacuum.

all anyone wants to discuss is the destruction of FDRs plan, the definition of bankruptcy, etc.

someone needs to weigh all of the alternatives based off the same set of info (whether it is conservative numbers or not as long as it is the same) and determine what the net end result is. then you tinker to give you the best result. leave the politics aside already and discuss the merits.

all i ever hear is Bush scare tactics about the world falling apart and the dem response about how Bush is trying to destroy the New Deal. Nothing of substance; nothing that will yield progress. Politics as usual.

3:31 PM  
Anonymous Anonymous said...

Just reading over the original post again, I have to give JABBS some credit for trying to find "objective" sources of information. He's quoting from the Social Security Administration actuaries -- hard to fight that. And factcheck.org is often referenced by conservatives when denouncing the likes of moveon.org, for example.

Yes, poll data can be questionable, but the results reported above fall in line with the general criticism that Bush and his pundit friends are distorting facts to sell the concept of privatization (I'm including the other item about conservatives linking Clinton and FDR to Bush's private accounts idea).

4:22 PM  

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