First, what does this calculator do? From the brief documentation, we learn that it assumes that the benefit formula will switch from wage to price indexing starting in 2012 and allow personal accounts, where contributions diverted to the accounts (plus interest at a real return of 3 percent) are further deducted from traditional Social Security benefits. This is a reasonable description of the way that personal accounts have been described by the Administration. The user can input a year of birth and a current level of earnings and the calculator will illustrate how future benefits from the traditional system and the personal account will compare to those projected under current law.
Second, what does this calculator show? As acknowledged in the documentation, only the date of birth matters for the percentage reduction in benefits from the two systems compared to what is scheduled under current law. For someone my age, the reduction is 22 percent of scheduled benefits. For someone my son's age, the reduction is 48 percent. I haven't verified these calculations--see some interesting decoding by Awptimus on that score.
Third, what is missing from this discussion? Five critical elements, as far as I can tell:
- The calculator explictly refers to benefits under current law as "promised." This is entirely inaccurate. Apart from the ability of the government to change the law at any time, there is no legal authority for some portion of these benefits to be paid after the Trust Fund is exhausted. The appropriate terminology is "scheduled" benefits, which conveys a lot less security than "promised" benefits, particularly when Senator Reid has proposed no way to fund the benefits that are scheduled but in excess of the system's future revenues.
- The documentation acknowledges that the assumptions used are those of the CBO, but it does not acknowledge that these assumptions are more favorable to the traditional system than those used by the Social Security Trustees.
- The calculations do not acknowledge that personal account plans, like Commission Model 2, explicitly include protections for career low-income workers. Senator Reid seems happy to use Commission Model 2 as a reference for some elements of his calculator, while ignoring those that would make personal account plans less risky to low-income workers.
- The calculations show only the personal account benefits that would obtain if the whole portfolio were invested in Treasuries. It is true that, in equilibrium, all securities must earn the same risk-adjusted rates of return and that, in most analytical frameworks, this is taken to be the return on Treasuries. However, it is also true that the opportunity to invest some of the portfolio in higher risk, higher return assets has value. The equilibrium condition is only that investors are indifferent between Treasuries and risky assets at the margin. They are not indifferent between an entire portfolio invested in Treasuries and a portfolio invested in their optimal mix of Treasuries and risky assets. The calculator ignores this, to the detriment of the personal account plan. (See this earlier post for additional discussion.)
- Most importantly, at no point on any web page--the calculator, its documentation, or the press release--does Senator Reid acknowledge that the President's plan, as implemented in this calculator, would restore the system to solvency in perpetuity based on current projections. This last criticism is particularly important because, at no point on any web page, does Senator Reid offer his own plan to restore the system to solvency.
Nevadans should have all the facts on the President’s plan to privatize Social Security and how it would affect their personal retirement future.I agree that Nevadans should have "all the facts." This calculator falls well short of the mark. The press release continues:
For the next 50 years, the government will be able to keep its promise and pay full Social Security benefits. Eventually, the baby boom generation will put pressure on the program and I want to find solutions. The right solutions that will not cut benefits or add trillions and trillions of dollars in debt as the President has suggested.The key sentence is the last one and more specifically the statement "will not cut benefits." If that's his view, then he should propose legislation that restores solvency without cutting benefits. That legislation could be as simple as, "The payroll tax rate will increase by 3.5 percentage points, from its current level of 12.4 percent to 15.9 percent, effective immediately." Senator Reid's approach differs remarkably little from that of Senator Kerry in last fall's campaign: quick to criticize the President, unable to provide solutions of his own.
If either one, or any other legislator, wants to propose a plan that does not include personal accounts, that restores solvency, and that does so without reducing aggregate benefit payments for about 50 years, the heavy lifting has been done by Peter Diamond and Peter Orszag. All any of them would have to do would be to publicly advocate that plan. So far, it has no sponsors on Capitol Hill.
Elsewhere in the blogosphere, see Say Anything and the Neo-Libertarian.
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