Editore"s Note
Tilting at Windmills

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January 5, 2005
By: Kevin Drum

SOCIAL SECURITY PRIVATIZATION IN PICTURES....Like Ross Perot, we're all about visual aids here at Political Animal. After all, a chart is worth a thousand words, right?

So here's a chart everyone ought to pay attention to. As we all know by now, George Bush's favored Social Security privatization proposal is rumored to be Plan 2 of the President's Commission to Strengthen Social Security known to its friends as CSSS Plan 2. This plan diverts one-third of payroll taxes to private accounts and cuts guaranteed future benefits by one half. (It does a couple of other things too, but these are the biggies.)

So: how does CSSS Plan 2 compare to the alternative of doing absolutely nothing? The nonpartisan Congressional Budget Office produced a report last July that examined exactly that. The chart below summarizes their findings.

Keep in mind that this chart is a worst case estimate for the "do nothing" alternative. It assumes there are no changes whatsoever to the system and that the trust fund becomes insolvent in 2053, at which point benefits would suddenly be cut by about 20%. Here's how that compares to CSSS Plan 2:

Hmmm. CSSS Plan 2 doesn't look too good, does it? Maybe good old fashioned Social Security is a better bargain after all.

Of course, I'm being unfair. Sure, guaranteed benefits will be slashed under CSSS Plan 2, but those slashed benefits will be augmented by the returns from private accounts. So what happens when we add up both guaranteed benefits and private account benefits in CSSS Plan 2? Here's the revised chart:

Private accounts still aren't as good as simply doing nothing. And this is despite the fact that this analysis stacks the deck in favor of private accounts by assuming stock market returns of 6.8% and total portfolio returns of 5.2%. That's pretty bullish.

So here's the deal: if we (a) do absolutely nothing and (b) assume that the CBO's economic estimates are accurate and the Social Security trust fund will become insolvent in 2053, thus forcing big benefit reductions, we're still better off than under CSSS Plan 2. More reasonable scenarios which include stronger economic growth, modest tax increases paired with modest benefit reductions, and more realistic stock returns make CSSS Plan 2 look even worse.

And did I mention that CSSS Plan 2 also produces bigger budget deficits for the next couple of decades?

Here's the CBO's bottom line: For a middle-income earner born today, first-year benefits even under the crisis scenario of Social Security "bankruptcy" would amount to $19,900. Under the private account scenario, initial benefits would amount to $14,600.

Now, tell me again why anyone aside from Wall Street brokers is supposed to like this plan?

Kevin Drum 3:03 PM Permalink | Trackbacks

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