Editore"s Note
Tilting at Windmills

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January 27, 2005
By: Kevin Drum

THE CATO CALCULATOR....Matt and Jesse have been having fun with the Cato Institute's Social Security Calculator, a handy piece of agitprop designed to convince you that private accounts will make us all as rich as Croesus. However, just in case you actually take this kind of thing seriously, figuring that even Cato has to calculate compound interest honestly, keep in mind the assumptions behind the "Calculate" button:

  • It assumes a 60-40 Stock-Bond fund that returns 5.27% per year. This means they're assuming a long-term real stock return of about 7% and a bond return of about 3%. This is absurdly high.

  • It assumes real wage growth throughout your life of 4% per year. In other words, if you're 30 years old and making $30,000 per year, they figure that by the time you retire at age 67 you'll be hauling in $128,000 in 2004 dollars. If you're a 30-year-old stock broker, there's a chance that will happen, but if you're a 30-year-old grocery checker there isn't.

  • They blithely assume away "debt service costs that could arise from financing the residual obligations of the current Social Security system." Cato's plan is a very expensive one, and its transition costs would probably be in the range of $20 trillion or so over 75 years. That's a lot to assume away.

Bottom line: the Cato calculator is a crock. Always remember to read the fine print.

Kevin Drum 4:00 PM Permalink | Trackbacks

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