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Thursday, May 19, 2005

Luskin is Wrong: Personal Accounts Do Not Protect Benefits

In his role as advocate for whatever the administration proposes, Luskin shows that he is either willing to intentionally mislead, or he does not understand basic concepts. First, he makes incorrect statements about liberal bias in the media that a simple Google search would have shown to be false. Second, he makes misleading claims about increasess in future benefits. Finally, he makes an argument that personal accounts as proposed by the administration protect future benefits. This argument is incorrect as shown below.

His first complaint is that Wexler’s proposal was not reported by the press.  That’s ridiculous.  Here’s a link to a CNN story on May 13. And here’s a link to a NY Times story on May 14th (which is still available here as of May 19th, the day Luskin's piece appeared).  Here's a Washington Post story yesterday, May 18th (Don – try Google). Yet Luskin says:

On Monday, Florida congressman Robert Wexler broke ranks with fellow Democrats by offering a plan to reform Social Security. Amazing! After months of party-line stonewalling, Wexler made a gesture of bipartisanship. And yet there hasn’t been one solitary word about it in the "paper of record," the New York Times.

Click the link above and see for yourself.

Next, let’s look at his claim that:

... for the middle 20 percent of average lifetime wage earners — surely that defines the “middle class” — progressive price indexing would increase benefits payable in 2050 from $1,208 (in 2005 dollars) to $1,380. And that doesn’t even include the additional increase in benefits that would accrue from investing in personal accounts. And the benefit improvement is even greater for workers below the middle class.

Here is more perspective on these numbers.  According to calculations by Jason Furman of the Center on Budget and Policy Priorities available here, a worker born in 1985 (who would be 65 in 2050) with a $50,000 income would, under the existing commitment, receive a monthly payment from Social Security of $2,355 per month ($28,260 annually). Under Bush-Pozen, it falls $1,684 per month ($20,347 annually, a cut of $7,913 or 28% relative to the current commitment).

Here’s Luskin’s argument. Using my figures (I couldn’t verify his, but like his, these are inflation adjusted), a retiree today with an income of $50,000 would receive $1,654 per month and, under Bush-Pozen that increases this increases to $1,696 for somone retiring in 2050, an increase of $42 per month over today's payment (not quite as attractive as the case Luskin chose to present). However, this is not an increase relative to the current commitment to pay benefits, it represents a cut of $7,913. Luskin wants us to believe we are better off because we receive $43 more per month conveniently forgetting about the $7,913 cut (which is $659 per month).

Finally, let’s look at one more claim that is used to argue against tax increases and for private accounts:

First, Social Security is already running a surplus — it takes in more in taxes each year than it will pay out in benefits (it will do so until 2017). Raising taxes today will just make that surplus larger. That’s a problem because that surplus isn’t being saved for the sake of the system’s future needs. The so-called Social Security Trust Fund uses the surplus to buy special-issue Treasury bonds — which is to say, it hands the surpluses over to the federal government to spend.

This is the standard lockbox argument for private accounts. Having had the solvency foundation crumble, this is their last resort, that the lockbox will prevent the government from spending your money. But it doesn’t, and closer inspection undermines this argument as well. Let’s take a numerical example. Suppose you currently pay $100 in taxes for promised benefits in the future of $100 (ignoring interest simplifies the exposition but does not change the basic result), but the government spends $20 so it only has the ability to pay $80 in the future (i.e. the government spends $20 more than it takes in from general fund revenues). Luskin is saying that if you raise taxes to $120 to make up the shortfall, the government will simply spend the extra $20 leaving the $20 shortfall in place.

But the government can still do this even if part of the contribution is placed in a private account. Suppose we take the $20 the government is spending and put it into a private account to "lock it up" (this is like diverting 4% out of 12% to private accounts under the proposal). Thus, you now give $80 to the government and put $20 into a private account. But the government is still spending as before so now the shortfall increases to $40 since revenues have fallen by $20. A solution is simple for the government is to reduce promised benefits from $100 to $80 in the future so that the shortfall is back to $20 again (or cut benefits to $60 to achieve buget balance). There is nothing about private accounts that prevents the government from reducing its share of the promised benefits as a means of solving budget deficit problems arising from an inability to reign in general fund spending.

As this shows, private accounts as proposed by the Administration do not prevent the government from spending your money and are no different than a tax increase in that regard. The argument that private accounts protect your retirement benefits is not correct because the government can always reduce its share of benefits to fund deficit spending in other parts of government.

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    Posted by on Thursday, May 19, 2005 at 11:16 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0)


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