While in Washington at the CEA, I had the opportunity to be the primary author on a chapter in the Economic Report of the President (ERP) about Social Security. You can download the whole document and read Chapter 6, or you can use that website search it for the relevant passages that I'll quote below.
On the campaign as of late (see Senator Kerry's speech in Wilkes-Barre on Tuesday and a press release and its background material from the same day), there are several examples of what I will politely refer to as "poor form." I'll take most of these quotes from the press release, just to keep things simple, but in an order that makes sense for the purpose of the post.
As the press release starts enumerating "facts," it states:
George Bush’s Plan Costs $2 Trillion – According to His Own AdvisersThe plan in question is a version of Model 2 presented by the President's Commission to Strengthen Social Security. You can find the Commission's final report here. You can find the Social Security Office of the Chief Actuary's scoring of the plan here. It is not a plan that the President has endorsed. Calling it "George Bush's plan" is inaccurate. Why is there any confusion? On page 142 of the ERP, in the third paragraph of a section on "Can We Afford to Reform Entitlements?" the report states:
As an illustration, consider the recent President’s Commission’s Model 2, under the assumption that all eligible workers will voluntarily choose to establish a personal retirement account (thereby maximizing the transition costs to be discussed below).The press release misrepresents an illustration as an endorsement. Were we really supposed to write about the economics of reforming Social Security through personal accounts without providing an example of such a plan? The press release gives something of a clue in an earlier sentence:
George Bush’s economic advisers analyzed one and only one Social Security plan: Plan 2 put forward by his Social Security. [sic--where's the proofreader for this campaign?]That would be a tough one for them to verify. I know that they didn't call me to ask me how many plans I analyzed. To clear up any of their confusion, I can attest personally that I analyzed numerous Social Security plans during my time at CEA. We only used one for the purpose of illustration. There must be some rule somewhere that stipulates that if we use one plan for an illustration, then we have to use many plans for illustration, even if doing so would not help answer the question, "Can We Afford to Reform Entitlements?" and would needlessly add length to the 240+ pages of text already in the ERP chapters. I will be curious to read an Economic Report from a hypothetical Kerry administration. Will they opt for no illustrations or needless illustrations?
It is also misleading to label this as "Plan 2 put forward by his Social Security" Commission. As the ERP clearly states, we have assumed 100 percent participation in the accounts for the purpose of illustration, so that no one would be able to say that we had understated the changes in deficit or debt that could result. Taking up the accounts is voluntary, so an assumption about take-up has to be made. Here's what the actuaries said (quoting from the actuarial memorandum):
For Model 2, participation would be expected to be higher. If the benefit offset yield rate is computed as 2 percent above the realized or expected inflation rate, actual net yields on personal accounts would generally, but not always, exceed the benefit offset yield rate. Due to this uncertainty, the 67-percent participation assumption is likely to be the most appropriate of the three assumptions in this case.Plan 2 put forward by the Commission would more accurately use the 2/3 participation rate. The Kerry campaign can have its $2 trillion in nominal costs over 10 years, but it also has to then agree that everyone would opt for personal accounts. Not a very good assumption for them to maintain while saying personal accounts are a bad idea. Which would they like?
Back to the press release. This next quote is particularly frustrating:
The Economic Report of the President 2004 says that “personal retirement accounts widen the deficit by design.”How about an ellipsis folks, or better yet, the whole sentence? On page 144, the ERP states:
Personal retirement accounts widen the deficit by design—they refund payroll tax revenues to workers in the near term while lowering benefit payments from the pay-as-you-go system in later years.The background file on the Kerry website has the whole paragraph with some red underlining of the part of the sentence that is quoted. Are we to understand that the Kerry campaign thinks that the second part of the sentence is irrelevant? It is most of the reason why anyone would add personal accounts to the system (the remainder being the opportunity to invest their contributions in financial assets other than Treasury bonds).
The press release then states (continuing its reference to the ERP):
Chart 6-4 shows the “change in the deficit” as a share of nominal GDP, these numbers correspond to $2 trillion in nominal dollars. The precise numbers are available in a Memorandum from the Social Security actuaries, they show that the current dollar cost is $2.004 trillion from 2005-14. [sic--can we get somebody over to the Kerry campaign who can edit a run-on sentence?]
Well, yes, that is one thing that is shown in (the data underlying) Chart 6-4, but that's not the most important thing that Chart 6-4 shows. To get an idea of what that might be, just read the caption to the chart:
Relative to GDP, reform initially increases then reduces the deficit and debt.I think that this is one of those things that a campaign staffer might miss by only underlining the first parts of sentences. The chart shows that all of the debt that would be accumulated during a transition is repaid, with interest, out of reduced program expenditures later on. This is what it means when the dashed curve crosses the horizontal axis and goes into negative territory. Looking at only the first 10 years of a reform that would affect cash flows for many decades is obviously not the right way to discuss policy. (In other areas, the Bush administration has made this mistake as well.)
The press release then quotes three newspaper stories that make similar errors. It finishes with some excerpts of a CBO report. The first one is:
CBO estimates that Bush’s plan will force benefit cuts (even when you include the value of the individual accounts) that grow to up to 45 percent. According to CBO, the President’s plan “would reduce expected retirement benefits relative to scheduled benefits, even when the benefits paid from IAs [individual accounts] under CSSS Plan 2 are included… For example, benefits for the 1980s birth cohort would be 30 percent lower, and benefits for the 2000s cohort would be 45 percent lower.”Note first that the CBO doesn't refer to this as "Bush's plan." More importantly, I suppose that the ellipsis in this paragraph includes the following footnote from the CBO's report:
13 Since the medians are presented here as point estimates, IA payouts are computed assuming risk adjusted returns equal to the Treasury bond rate.The CBO shares some of the blame for this one. CBO inappropriately uses the phrase "expected retirement benefits" in the text but then clarifies that it is using the Treasury bond rate to accumulate the accounts. The appropriate terminology for CBO would be to say that it is assuming that the portfolios were invested entirely in Treasury bonds. This is the most conservative investment approach, since it chooses to take on zero equity risk. As long as the equity premium is positive, this assumption serves to overstate the reductions in expected benefits that would occur. (As implied in the footnote, we would really want to see the whole distribution of possible benefit levels, not just point estimates.)
This is a very odd assumption to make as a baseline. As far as I know, there is no presumption among people who propose adding personal accounts to Social Security that people who opt for them would then choose to invest them in such a way that eliminated one of the key advantages of having a personal account--the opportunity to obtain higher expected returns in exchange for taking on some financial risk.
Another issue with this quote is that the CBO is making a comparison to "scheduled" benefits, but we know that there are not enough projected revenues to pay scheduled benefits. Comparing an infeasible current law baseline to a reform that is feasible is obviously not a sensible thing to do. The last part of the press release seems to be designed to address that:
Even compared to a scenario with benefit cuts to extend solvency, Bush’s plan would still cut benefits. CBO analyzed a hypothetical scenario with benefits to ensure Social Security is solvent. Specifically, CBO assumes that benefits are paid by payroll taxes after Social Security’s projected insolvency in 2052. Bush’s plan has lower benefits than even this scenario.But, of course, the 45 percent number is the one that will be quoted--for example, in the speech:
According to the nonpartisan Congressional Budget Office, the Bush privatization plan would cut Social Security benefits. It will cut them by 23 to 45 percent.Having the last paragraph in the press release does not undo the critique that the Kerry campaign has made an inappropriate comparison in the speech. Note as well that the speech does not clarify that the reductions in benefits are explicitly not going to affect anyone in or very near retirement today.
The press release also does not refer to the benefit simulations that were done in the actuarial memorandum it cited earlier. The Social Security actuaries are also nonpartisan--this isn't an issue of credibility. The simulations that appear to be least favorable to personal accounts are presented in this table. This table includes projections for workers with low, medium, high, and maximum earnings, for different assumptions about the portfolio investment, and for different years of eligibility.
Focusing again on the worst case scenario for the personal accounts (the 2075 retiree), the table shows two useful things. First, even with a portfolio entirely in Treasury bonds, a low-earning retiree would obtain more than 100 percent of the benefits payable (the concept being used in the last paragraph of the press release). This is due to the redistributive elements of Model 2 that were included for this purpose. This is not true of the other earnings levels--an important refinement of the point made in the CBO report.
Second, with a portfolio invested half in equity and half in a mixture of corporate and Treasury bonds, workers with low, medium, and high earnings are expected to get over 100 percent of payable benefits, though not as much in benefits as is scheduled under current law. And again, this is an expected benefit level, so it includes some financial risk, and whether you believe this is good policy will depend in part on whether you believe first that the expected return assumptions are valid and second that it is appropriate to let workers decide for themselves if the return justifies the risk. The Kerry campaign has ignored an important section of the actuarial memorandum that it cites in other places.
That's my reading of the Kerry campaign's criticism of the President's Social Security policy. Every quote in that press release is selectively excerpted to confuse the reader about the key issues with the Commission's plan, the President's association with it, the ERP's discussion of it, and CBO's analysis of it. There is also nothing in the Kerry speech that provides anything more than boilerplate about what the Senator would do to reform the system. (Start reading after the criticisms of the President--not all of which are inaccurate--with the statement, "John Edwards and I have a real plan to cut the budget deficit in half and protect Social Security." Tell me if you see a plan.) There is also absolutely no recognition of the magnitude of the hole in Social Security's finances.
I'll state the following for the record (with this whole post as the context): I am disappointed that this issue hasn't moved more quickly under President Bush and will take some responsibility for not doing more to help it along while working in Washington. I believe that the President should submit some plan to Congress that restores the system to solvency--whether the Commission's Model 2, another plan that has been scored by the actuaries, or something better--to restart the bipartisan reform process. It would be reasonable to hold him to account for the failure to do that, but only someone who actually had a plan could credibly do that.
In an upcoming post, I'll discuss what I think might be better and what Democrats who do not favor personal accounts should be saying about how they would reform Social Security.