From: Henri Hein
Sent: Thursday, December 16, 2004 12:08 AM
Subject: Social Security Misinformation
noticed your reference to Dean Baker’s misinformation on the following
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
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.