Editore"s Note
Tilting at Windmills

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February 17, 2005
By: Kevin Drum

CALCULATOR CAGE MATCH....Via Josh Marshall, here's yet another Social Security calculator that helps you understand the joys of private accounts.

Except, um, this one is a little different: it's from New York senator Chuck Schumer and it's designed to show how much you'll lose in traditional benefits under Bush's plan and how little you'll gain. Two can play at the calculator game!

So let's compare, shall we? I'm a 46-year old male, and if I plug that into the Cato Institute's calculator and then enter an annual salary of $40,000, they claim that my private account will pay me $20,034 per year upon retirement, $1,906 more than Social Security would. Not bad!

Now let's try Schumer's calculator. Plug in 1958 and $40,000 (no choice of gender allowed), and my private account will be worth....$1,866 per year. Sadly, this is offset by a reduction of $3,773 in traditional benefits. Damn.

So who's right? Schumer explains his assumptions here, and needless to say they're a wee bit different from Cato's. He figures a net rate of return of 2.7% instead of Cato's 4.95%. He assumes retirement at age 65, not 67. He assumes a constant average salary instead of Cato's endless 4% real growth. He assumes the plan starts in 2009 and contributions are capped at $1,000 per year (plus annual growth) whereas Cato figures the plan starts now, has a contribution rate of 6.2% of your salary, and completely replaces Social Security. And Schumer assumes that traditional benefits will be cut both by changing the indexing formula and by the "privatization tax" favored by George Bush, which reduces your benefits based on how much money you accumulate in your private account.

So who's right? Hard to say. Schumer's 2.7% rate of return, for example, is as needlessly pessimistic as Cato's 4.95% is needlessly optimistic although the rest of Schumer's assumptions seem broadly reasonable (unlike Cato's, although they've changed them a bit since I last wrote about them). Beyond that, what this shows is just how much details matter in any privatization plan. Small differences in wage growth, retirement age, and contribution rates make a very big difference after being compounded for a couple of decades.

In other words, buyer beware. When Democrats complain that Bush hasn't produced a detailed privatization plan, this is the reason. Without an actual plan on the table, you can dangle pretty much any pot of gold you want in front of future retirees. Once a real plan is put down on paper, though, you can do real calculations and figure out whether it really works. The fact that Bush is so reluctant to do this should certainly make everyone skeptical that his plan is as good as he says it is. Schumer's calculator makes that abundantly clear.

Kevin Drum 1:58 PM Permalink | Trackbacks

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