From: Henri Hein
Sent: Thursday, December 16, 2004 12:08 AM
To: ''
Subject: Social Security Misinformation


I noticed your reference to Dean Baker’s misinformation on the following page:


Baker’s article is mostly hyperbole, but let’s just do a basic fact check.  Middle of second paragraph, he states: “price-to-earnings ratios in the stock market are far higher now than in the past, and the Social Security trustees project that profits will grow at about half the rate they did in the past. He then accuses privatization opponents [Ed: should have been proponents] of not taking this into account.  That’s just hogwash.  First of all, there have been times in the past when P/Es have been at the current level and even higher.  In the late twenties, for instance, P/Es were higher than they are now.  Yet, even if someone had retired under a private system in 1933, with the worst possible historical return, he or she would still have received a 4% overall return.  That is much better than the 0%-2% returns we – current workers – can expect under the SSA as it’s structured today.


Then there is the higher administration cost of PRAs (Private Retirement Accounts).  According to your own comment, that is the entire point!  If so, you do not have much of a case.  Today’s SSA administers retirement accounts at the cost of about $10 per worker.  A PRA system would initially cost about $50 per worker, annually.  $100 per worker would be worst case and would only be for a short period when there are lots of smaller accounts.  I calculated this out in Excel.  For a worker with a $10,000 salary, assuming a $10 expense and %2 return under the current system, yields a future value of about $300,000 over thirty years.  This is of her 6.2% OASDI contribution.  Assuming a $50 annual expense and a 4% yield, this gives her about $400,000 over the same period.  Even with a $100 expense annually, she still comes out at $360,000.  PRAs are superior even in these worst case scenarios. 


This is borne out by the empirical evidence that Baker mentions, though he fails to call this out.  After Chile went to a private system, retirement benefits went up 50% to 100%, across the board.  Why would anyone be against American retirees enjoying a doubling of their retirement benefits?  Baker fails his own “left behind” test when he concludes that PRAs would leave workers with “less money than they’d have under the current system.”  The opposite is true.


In the next paragraph, he states that the current system is solvent until 2042.  This is pure voodonomics.  When the SSA surplus disappears in 2018, how will the deficit be funded?  Whether it is funded from an increase in payroll taxes or general revenue, the actual return on retirement contributions go down.


Even your liberal friends at Brookings agree that changes will be required to keep the system solvent.  See for instance  My question to you and them is: Social Security taxes have been raised many times in the past, from the original 2% to the current 12.4% (combined employee and employer tax).  You should not be surprised when the suggestion that we just keep worsening the deal is disagreeable to some of us.  Do you want to pay 25% just in Social Security tax?  Do you want your children to?  I don’t.


Baker’s last paragraph is elucidating.  What is “real world” about the question, “Would you like a private account if it means a cut in your Social Security benefits?” I know of no poll that asked this question, and I know of no sane person who would answer yes.  What does that reveal about the public’s opinion about Social Security?  In reality, many, probably most, Americans are in favor of private accounts.  Even the Hart-Teeter poll, the one often referred to by PRA opponents, came out with 40% in favor and 55% opposed to PRAs.  That is hardly a “vast majority” saying no.  Those types of results only come out in polls that emphasize the risk to PRAs and compare it to a current system.  However, the current system is not sustainable, so comparing an implied ‘risky private system’ with an implied ‘rock solid current system’ does not reflect the real world.


You imply there are not two sides to the issue.  Those must be bitter words to swallow.  Private accounts are in our future, and we’ll be much better off for it.  When that time comes, I’ll look forward to reading your retraction.



-          Henri Hein






  [Ed: The calculations in the second paragraph are for a $120,000 salary, not for a $10,000 salary as mentioned. For someone with a $10,000 salary, the corresponding returns - future value - under the three different scenarios are $25,000, $33,000 and $30,000. The relative difference is still there, and it's obvious that the higher return of PRAs can easily absorb the higher administrative costs.]


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