David Wessel, who is consistently one of the best economics columnists I
have read, has an article in today's Wall Street Journal about what may
be the Bush personal account plan (in reality, Bush hasn't released all
the details, and I suspect he is playing a game where he will fiddle the
plan details until he believes he has a strong chance at passing it, and
then he will release the details)
A couple weeks ago, however, it became apparent that the current
version of the Bush plan uses a 3% real interest rate for calculating
the reduction in traditional SS benefits, whereas most people had
expected it to be 2%. I was very disappointed to see the 3% figure, it
is unreasonably high. According to Dimson and Marsh in _Triumph of the
Optimists_, from 1900 to 2000 the annualized real return on long-bonds
in the US was only 1.6%, intermediate bonds 1.6%, and treasury bills
0.9%. Also, during 1900-2000, the long-bond real returns for Australia,
Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan,
Netherlands, South Africa, Spain, Sweden, Switzerland, and the UK were
1.1, -0.4, 1.8, 2.5, -1.0, -2.2, 1.5, -2.2, -1.6, 1.1, 1.4, 1.2, 2.4,
2.8 and 1.3%, respectively. The highest is Switzerland at 2.8%. Clearly
3% is too high. I'm afraid it would encourage people to take too high of
a risk on their personal accounts to try to beat the 3%, when in reality
they should be invest at least 60-70% of their personal accounts in safe
bonds.
Anyway, here is Wessel's article. He has some nice charts with it, but
if you want to see them you are going to have to pay for it!
February 17, 2005
CAPITAL
By DAVID WESSEL
The White House is being stingy with specifics about far-reaching
changes to Social Security that President Bush is seeking, reflecting
an apparently tactical choice that more details would draw more attacks
that could doom the proposal. But the president and his aides have
said enough to allow outsiders to plug numbers into spreadsheets to
illustrate how Bush-style Social Security might work.
The examples -- which the White House says are "premature" -- underscore
how far Mr. Bush would move Social Security away from a system that
offers monthly payments regardless of the financial market's ups and
downs to one in which retiree benefits depend heavily on stock and bond
market performance.
Under an approach similar to one Mr. Bush is advocating, retirement
benefits wouldn't change at all for workers or retirees 55 and older,
and wouldn't change very much for workers now in their 40s or early
50s. But for younger workers, particularly today's teenagers or those
in their 20s who would spend their entire working lives under the new
system, Social Security would be very different.
They would continue to pay 12.4% of their wages into Social Security,
split evenly between employer and employee, but they could divert up
to 4% into a private account. When upper-wage workers in this younger
cohort retire in mid-century, 85% or more of their total Social Security
benefits -- the traditional program plus what they draw from their
private accounts -- would come from that private account.
Take a young man born in 1990 -- 15 years old today -- who earns a
higher-than-average $58,400 a year, in today's dollars, from 2011 until
he retires in 2055. Say he opts to put 4% of his wages into a Bush-style
private account. He and his employer would put another 8.4% of wages
into traditional Social Security.
At retirement, he'd draw both from his private account and from
traditional Social Security. But that traditional benefit would be
reduced twice from levels written into current law under a Bush-style
proposal: once because he diverted some of his payroll taxes into a
private account and a second time because Mr. Bush proposes to reduce
promised benefits across-the-board to make Social Security solvent for
the long haul.
If the law remained unchanged, such a worker is scheduled to get
$28,863 a year in Social Security retirement benefits. But Mr. Bush and
experts from across the political spectrum say the system as currently
structured can't afford that. If he were paid only what today's tax
rates would support, his benefit would be $21,126 a year. If benefits
were reduced to make Social Security stable, using an approach that a
Bush-appointed commission favored, he'd get $18,406 a year. All that's
before any private account.
Under a Bush-style plan, if the worker opted for a private account, his
traditional retirement benefit would be reduced sharply: He'd get just
$2,191 a year from traditional Social Security. If his stock and bond
mutual funds earned 3% a year after inflation, he'd have a $234,912 nest
egg at age 65. If he turned that account into an annuity at retirement,
he could get another $16,215 a year for life from his private account
for a total annual benefit of $18,406. If stocks and bonds earned 4.6%
a year after inflation, he'd get $28,396 a year; if they earned less,
he'd do worse. But he'd get that same $2,191 traditional Social Security
check no matter what the markets do.
The Wall Street Journal's examples rely on a spreadsheet built by
Jason Furman, a New York University economist who opposes Mr. Bush's
proposal. He worked on John Kerry's campaign and consults for the
liberal Center on Budget and Policy Priorities think tank. His
spreadsheet is built on publicly available Social Security data,
estimates the impact of proposals the White House has described and
allows the user to specify various assumptions.
The White House takes issue with this approach and with Mr. Furman's
estimates. "Any numbers are premature," said White House spokesman
Trent Duffy. "This whole exercise is looking only at a limited number
of options that are available to the president and Congress. This whole
exercise doesn't make sense because it's too early in the process."
Other senior administration officials, who spoke on condition that
they wouldn't be named, challenged some of Mr. Furman's techniques
for gauging the effect of Mr. Bush's proposals. "We can't verify
[Mr.] Furman's numbers, and we have concerns about the accuracy of
them," Mr. Duffy said.
The White House won't say when, or even if, Mr. Bush will make public a
detailed plan. He could continue to offer suggestions to Congress and
hope a compromise that he can accept will emerge. His only firm demands,
so far, are to fix Social Security for a long time, avoid a payroll-tax
increase and create private accounts. In New Hampshire yesterday,
Mr. Bush left the door open to raising the maximum wages subject to
the 12.4% payroll tax, now $90,000 a year. "Step one," the president
said the other day in Raleigh, N.C., "is to convince people there's a
problem. And once it gets in their mind that there is a problem, the
follow-up question is, 'OK, now you see the problem, now what are you
going to do about it?' And we haven't got quite to the 'what are you
going do to about it?' stage yet." Any plan that Congress passes is
almost certain to differ in detail, and perhaps in concept, from the one
Mr. Bush is discussing.
Critics of Mr. Bush's approach fear high-wage workers might eventually
rebel against paying taxes to support a traditional Social Security
program that appears to them so little, eroding support for a program
that guarantees a safety net for every worker in old age or in case of
disability. "The president's proposal seems designed to trick higher
wage earners into resenting the existing Social Security system. It
creates an impression that they will get almost nothing out of Social
Security," says Peter Orszag, a Brookings Institution economist who
dislikes the Bush approach.
The president and his allies say the existing Social Security system
will collapse without significant change, and argue that allowing
younger workers to invest in mutual funds is more likely to leave them
better off at retirement than alternative approaches to fix Social
Security.
Mr. Bush emphasizes the size of the nest eggs that workers might
accumulate, but not the related reduction in those workers' traditional
Social Security checks. "A young person who earns an average of $35,000
a year over his or her career would have nearly a quarter million
dollars saved in his or her own retirement account," he said in his
Saturday radio address last week. "And that money would provide a nest
egg to supplement that worker's traditional Social Security check, or to
pass on to his or her children. Best of all, it would replace the empty
promises of the current system with real assets of ownership."
The examples in this story, and others posted on WSJ.com7, are based on
the following assumptions about Mr. Bush's plan:
The president would allow workers born after 1949 to divert up to 4% of
wages into private accounts. He'd limit their contributions to $1,000 a
year initially. "Yearly contribution limits would be raised over time,
eventually permitting all workers to set aside 4 percentage points of
their payroll taxes in their accounts," the White House says. It has
specified how it would lift the contribution limit through 2015 --
but not beyond. These examples assume that the limit on contributions
continues to rise so that by 2042 every worker can put 4 percentage
points of his payroll tax into a private account.
The president says those who opt to divert payroll taxes into a private
account would have to accept a reduction in traditional Social Security
benefits at retirement. The spreadsheet incorporates the White House
formula for doing so. Workers whose private accounts earn more than 3%
after inflation on their private accounts would be better off than peers
who don't opt for private accounts, under the Bush formula. Workers who
earn less than 3% would be worse off.
The president says further reductions in benefits promised to future
retirees (whether they opt for private accounts or not) are required
to fix Social Security's finances, but he won't say what option he
prefers. "In recent years, many people have offered suggestions, such
as limiting benefits for wealthy retirees; indexing benefits to prices,
instead of wages; increasing the retirement age; or changing the benefit
formulas and creating disincentives for early collection of Social
Security benefits," he said in Saturday's radio address. "All these
ideas are on the table."
The examples detailed alongside this article show three scenarios for
traditional Social Security benefits: (1) Social Security pays the
benefits promised by current law, (2) Social Security pays the benefits
that current tax rates would support, and (3) Social Security reduces
initial retirement benefits by changing the formula used to calculate
them beginning in 2012. This change was recommended by a commission
Mr. Bush appointed and has been publicly praised by administration
officials; the White House emphasizes that it hasn't endorsed it,
though. If Mr. Bush sticks to his vow to avoid raising taxes, then
benefit reductions of this magnitude are required to fix Social Security
as he intends. Different approaches would affect low-wage and high-wage
workers differently than this one.
The president says, "Personal retirement accounts could not be emptied
out all at once, but rather would be paid out over time, as an addition
to traditional Social Security benefits." These examples assume the
worker turns his private account into an annuity that pays out over his
lifetime.
The examples rely on an economic forecast made by Social Security
actuary that has drawn fire from some for being too pessimistic about
the likely pace of economic growth and from others for misgauging the
likely life spans of the elderly in the 21st century. The projections of
financial market returns are illustrative, not predictions.
Mr. Furman's examples are built on profiles of three typical workers
prepared by the Social Security actuary from historic evidence -- a
low-wage worker, a medium-wage worker and a high-wage worker -- and a
fourth that illustrates a worker who earns at or above the maximum wage
subject to the Social Security payroll tax, currently $90,000, for his
career.
Write to David Wessel at [EMAIL PROTECTED]
URL for this article:
http://online.wsj.com/article/0,,SB110859134049856892,00.html
Hyperlinks in this Article:
(1) http://online.wsj.com/articles/capital_exchange
(2) mailto:[EMAIL PROTECTED]
(3) http://online.wsj.com/documents/WSJ_CAPITAL_SS-021605.pdf
(4) http://online.wsj.com/documents/WSJ_CAPITALjp_SS-021605.pdf
(5)
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(6) http://online.wsj.com/page/0,,2_1132,00.html
(7)
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(8) mailto:[EMAIL PROTECTED]
(9) mailto:[EMAIL PROTECTED]
ABOUT DAVID WESSEL David Wessel, 50 years old, The Wall Street Journal's
deputy Washington bureau chief, writes Capital, a weekly look at the
economy and the forces shaping living standards around the world. He
also appears frequently on CNBC.
David has been with The Wall Street Journal since 1984, first in the
Boston bureau and then the Washington bureau, where he was chief
economics correspondent. During 1999 and 2000, he was the newspaper's
Berlin bureau chief. He also has worked for the Boston Globe and at the
Hartford (Conn.) Courant and Middletown (Conn.) Press. He has shared two
Pulitzer prizes, one for a Boston Globe series on race in the workplace
in Boston and the other for Wall Street Journal stories on the corporate
scandals of 2002.
He is the co-author, with fellow Journal reporter Bob Davis, of
"Prosperity: The Coming 20-Year Boom and What It Means to You" (Random
House/Times Books, 1998), which argued that the next 20 years will be
better for the American middle class than the previous 20 years.
_______________________________________________
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