Subject: (BN ) Bush Makes False Claims About Social Security: John M
From: JOHN BERRY, BLOOMBERG/ WASHINGTO (JBERRY5@bloomberg.net)
Date: Fri Jan 21 2005 - 09:10:06 EST
Bush Makes False Claims About Social Security: John M. Berry
2005-01-21 07:43 (New York)
Bush Makes False Claims About Social Security: John M. Berry
(Commentary. John M. Berry is a Bloomberg News columnist. The
opinions expressed are his own.)
By John M. Berry
Jan. 21 (Bloomberg) -- President George W. Bush's assertions
that Social Security faces a crisis and is ``flat bust, bankrupt''
are patently false.
Bush and other administration officials are greatly
exaggerating potential problems facing the program to push through
changes that would undermine the most successful social insurance
program in the nation's history.
The system is so far from crisis or bankruptcy that the truly
prudent course at this point most certainly would be to make no
changes in Social Security at all. Wait and see if even under
conservative assumptions the date at which the system's trust fund
would be exhausted keeps receding.
In 1994, Social Security trustees put that date at 2030 using
their intermediate projection, the middle one of three. By 2004,
10 years later, the date had been pushed out 12 years, to 2042.
And even after that, 75 percent of promised benefits could still
be paid.
That's neither a looming crisis nor bankruptcy.
Bush has no intention of being prudent. Instead, he obviously
wants to undermine confidence in the program to create a political
climate in which Congress will approve diverting a portion of the
payroll tax that funds Social Security to individual accounts for
workers with the money invested in equities and corporate and
government bonds.
By assuming unrealistically high returns on equities, the
private accounts are being sold as a way to make up for the
alleged inability of Social Security to pay promised benefits in
the future.
Wehner Memo
Unfortunately for Bush, earlier this month a memo written by
Peter Wehner, his director of strategic initiatives, appeared in
the newsletter Congress Daily and has since been widely quoted.
``You may know that there is a small number of conservatives
who prefer to push only for investment accounts and make no effort
to adjust benefits -- therefore making no effort to address (the)
fundamental problem'' in Social Security, Wehner said. ``In my
judgment, that's a bad idea.''
In other words, private accounts would not fix the allegedly
``bankrupt'' system. Since no one working for Bush is about to
suggest taxes be raised, the only alternative would be to reduce
benefits. All the Washington chatter is about freezing the real
value of benefits at their present average level of about $1,200 a
month. Currently, benefits are indexed annually for both inflation
and real wages.
Ducking `Duty'
``If we duck our duty, it can have serious short-term
consequences,'' Wehner said. ``If we borrow one to two trillion
dollars to cover transition costs for personal savings accounts
and make no change to wage indexing, we will have borrowed
trillions and will still confront more than $10 trillion in
unfunded liabilities. This could easily cause an economic chain-
reaction: the markets go south, interest rates go up, and the
economy stalls out.''
So far there is no word from the White House about whether
Bush will follow Wehner's advice. That is, whether he will seek
not just to borrow that ``one to two trillion dollars'' to finance
creation of private accounts but also propose a major cut in long-
term benefits through indexing benefits henceforth only for
inflation.
And a major cut it would be.
Benefits Increase
The first Social Security recipient got a monthly benefit of
$22.54 in 1940. Indexed just for inflation, that benefit would
have increased to about $304 for a worker retiring this year.
Instead, as a result of specific legislated benefit increases
prior to the late 1970s and of indexing for inflation and real
wage increases since then, a single worker retiring this year will
receive $955, according to projections by the Social Security
Administration.
Obviously, the real value of today's benefits is far higher
than in 1940. On the other hand, those benefits replace roughly
the same share of workers' earnings at retirement as they did many
years ago. In other words, benefits have increased over the years
reflecting the enormous gains in the nation's standard of living.
In a speech on Dec. 18 before the Council on Foreign
Relations in Washington, N. Gregory Mankiw, chairman of Bush's
Council of Economic Advisers, addressed this point.
Mankiw on Benefits
``A person with average wages retiring at age 65 this year
gets an annual benefit of about $14,000, but a similar person
retiring in 2050 is scheduled to get over $20,000 in today's
dollars. In other words, even after adjusting for inflation,
today's 20-year-old worker is promised benefits that are 40
percent higher than what his or her grandparent receives today,''
Mankiw said.
Well, among other things, that would be a significantly
smaller increase in real benefits than has occurred over the past
45 years. And if the real value of benefits were frozen over an
extended period of time, public support for Social Security
undoubtedly would be undermined. Some advocates of privatization
of Social Security readily acknowledge that is their goal, and
some of them have criticized Bush for not being bold enough in
moving in that direction.
Interestingly, Mankiw made no mention of private accounts in
his speech. In closing, though, the CEA chairman derided everyone
who questions the administration's claims about its finances.
``As the nation debates alternative proposals, you should be
careful to avoid the sophistry of those opposed to reform,'' he
cautioned. ``In particular, be wary of those who argue that there
is no Social Security problem or that only small changes are
needed to address it. The truth is that Social Security faces
fundamental financing challenges.''
`Ostrich Caucus'
``Just ask the Social Security Trustees, the Congressional
Budget Office, or any other group of nonpartisan analysts.
Reasonable people can debate what kinds of reforms are best, but
don't let the Ostrich Caucus convince you to put your head in the
sand,'' he said.
Well, the Ostrich Caucus includes some very knowledgeable
economists such as Federal Reserve Governor Edward M. Gramlich,
who headed a Social Security advisory commission a decade ago and
believes that relatively small changes are needed.
Or one could read last year's Social Security trustees report
which, as usual, provided three alternative projections --
projections, mind you, not forecasts -- of the system's financial
future. One of them showed it fully solvent for 75 years.
And the report cautioned that ``significant uncertainty''
surrounds all of the projections, including the intermediate one
on which the administration bases most of it allegations about
long-run insolvency.
`Grossest Malpractice'
A moderately different set of assumptions used in the so-
called low-cost projections show Social Security able to pay full
benefits for the next 75 years. Compare the low-cost assumptions
listed first below with the intermediate assumptions:
-- Unemployment: 5.5 percent vs. 5.8 percent.
-- Productivity Growth: 1.9 percent vs. 1.6 percent.
-- Increase in Real Wages: 1.6 percent vs. 1.1 percent.
-- Fertility Rate: 2.2 children per woman vs. 1.95.
-- Rate of Decline in Mortality: 0.33 percent vs. 0.71
percent.
-- Immigration: 1.3 million vs. 900,000.
Why should someone be condemned to the Ostrich Caucus for
believing that some of the low-cost assumptions are more likely to
be closer to the mark than those of the intermediate set?
What Bush, Mankiw and others are touting as certain disaster
is not certain at all.
Lest anyone question that view, Mankiw continued in his
speech, ``Some will argue that these problems are far in the
future and that there is no need to address them today. Imagine if
a financial planner offered the same counsel to his 30-year-old
client: `Don't worry, Joe, retirement is 35 years away, you don't
need to save anything.' That planner would be guilty of the
grossest malpractice.''
Actually, in making such an absurd comparison, Mankiw himself
is guilty of the grossest malpractice. Of course, he has plenty of
company in the White House.
--Editors: Ahearn, West.
Story illustration: For functions related to Social Security, see:
{ALLX SSA <GO>}. For a rolling tour of information on politics and
government: {CNP 00852710111 <GO>}.
To contact the writer of this column:
John M. Berry in Washington at (1)(202) 624-1962 or
jberry5@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at (1)(212) 893-4197 or bahearn@bloomberg.net.
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