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"How did retiring New York Senator Daniel Patrick Moynihan get away with stating a demonstrable falsehood on the Op-Ed page of the New York Times without anyone pointing it out?

"In a piece published May 30, Moynihan outlines his plan to partially privatize Social Security and lambastes those who would charge that his plan would endanger current benefits. (He even calls the charge "obscene.") Why is the charge "obscene"? Because, under his plan, "the present progressive benefit is fixed ... There is no occasion to touch it." So, according to Moynihan, the charge is obscene because current benefits are not reduced.

"But this is simply false. Moynihan's plan does call for cuts in current Social Security benefits. Who says? Moynihan says. And in the very same article. In paragraphs 9, 10 and 11 of Moynihan's article, he describes specifically how his plan would reduce benefits in order to free up money for his individual accounts. If anyone else but Moynihan tried to pass off a line like that, he'd be skewered. So why does Moynihan get a pass?" --Joshua Marshall, Salon, 6/2/00

"'I think that workers should be free to invest some of their contributions, say 15 percent, on their own. Of course, we have to maintain the benefits of today's retirees. So in return for giving today's workers the privilege of investing 15 percent of their contributions, I'm going to cut their guaranteed benefits by a lot more than 15 percent -- 30 percent, 40 percent, whatever it takes to keep the system actuarially sound. I believe that today's workers can make enough money in the stock market to compensate. And if you can't, my fellow Americans, that's your problem!'

"That, as far as I can make out, is what George W. Bush is actually proposing -- though he has been more than vague about the details. He hasn't specified how much guaranteed benefits would be cut, let alone clearly stated that the percentage cut would have to be a lot larger than the share of contributions workers were freed to invest. (The plan described by Senator Daniel Patrick Moynihan on this page yesterday would in effect impose cuts on that scale, mainly through reduced cost-of-living adjustments and increased taxes on benefits).

"What a politician can't honestly say is something like, 'Even if a worker chose only the safest investment in the world, an inflation-adjusted U.S. government bond, he or she would receive twice the rate of return of Social Security' -- as if that were a meaningful comparison, as if the obligations to today's older Americans didn't have to be met. But that quote isn't made up -- it's what Mr. Bush actually said." --Paul Krugman, NYT, 5/31

"Social Security provides the majority of income for most retirees and all the income for about a fifth of the elderly. From its inception, the system has taken in payroll taxes from the working generation and turned almost all of them over to retirees. At the core of Social Security are the notions of social insurance -- everyone participates in a common plan -- and redistribution -- the program tilts in favor of low-paid workers. The benefits for low-paid workers are about 80 percent of their average lifetime earnings, while benefits for high-paid workers are about 30 percent of average earnings. The progressive formula has cut the poverty rate among the elderly by two-thirds, reducing their poverty to below that of the general population. That is a remarkable triumph....

"The system will run surpluses for the next 15 years, building a large reserve. But in 2010, the first wave of the baby boomers -- the nearly 80 million people born between 1946 and 1964 -- will begin to retire and collect retirement checks. The number of people in the work force for every retiree will fall from about five today to about three in only 30 years or so. That, and the fact that people are living longer, will put a strain on workers to support the retirement needs of the elderly. The system will begin to run deficits around 2015. By 2037, the trust fund is expected to be empty.

"But for all the talk of bankruptcy, the system is not facing irreparable financial crisis. Even after 2037, payroll taxes will cover about 70 percent of promised benefits. Deficits over the next 75 years, the planning horizon for the program, will equal less than 2 percent of total payrolls -- hardly a catastrophic shortfall. If the economy were to grow only slightly faster than the actuaries at the Social Security Administration now project, the deficit would disappear.

"One proposed remedy for financial imbalance is partial privatization, the approach favored by Governor Bush. Under current law, workers and employers pay a 12.4 percent payroll tax that goes into a public trust fund. Under partial privatization, workers could divert, say, two percentage points of that tax to private accounts that the worker could then invest in stocks and bonds. Workers would collect less money from the trust fund when they retired, alleviating financial strain on the system. But they would expect to more than make up for the loss by drawing from their private accounts.

"Mr. Bush's sketchy proposal fails to answer where he would find the money to pay retirees as payroll taxes were diverted into private accounts. But there are other fundamental problems with the proposal as well.

"Proponents of private accounts say that investors, based on data going back to the early 20th century, can expect to earn about 5 percent annually above inflation on a diversified portfolio of stocks and bonds. By contrast, the taxes they "deposit" in the trust fund will earn an implicit return -- measured in future retirement benefits -- of only 1 to 2 percent above inflation.

"But that comparison is highly misleading. Private accounts invested in stocks and bonds may well earn less than 5 percent because the economy is expected to slow over the next several decades as the population ages and because stock prices are now overvalued.

"More important, the advantage that proponents cite on behalf of private accounts is an optical illusion. The trust fund faces the burden of paying trillions of dollars beyond what payroll taxes raise over the next 75 years to provide the benefits the system is obligated to pay current and future retirees. The sole reason that private accounts look like a better investment than the trust fund is that proponents assume the private accounts would be relieved of the burden of helping to pay that obligation. But that just deflects the burden onto someone else, requiring Congress to slash retirement checks or other government spending, or to raise taxes.

"Mr. Bush cites as an advantage that private accounts can be invested in stocks whereas the trust fund by law cannot. But if the law were changed to let the trust fund itself purchase stocks, as President Clinton has proposed, it could invest in the markets far more cheaply than could private accounts. The cost of administering 150 million individual private accounts would be huge, eating away 20 percent or more of worker deposits. Private accounts could also subject individuals, including the poor, to unacceptable investment risk at the most vulnerable time in their lives. Worse, they undermine the principle of social insurance, setting individuals off to fend for themselves without looking out for the needy....

"Raising the payroll tax by, say, a half percentage point in 20 or 30 years or transferring a small fraction of general tax revenues into the trust fund would go a long way toward solving the problem. If these and similar measures do not close the entire gap, Congress could hasten the transition to the higher retirement age, 67, that Congress passed in the 1980's. The Social Security "crisis" is less drastic than it seems, and can be fixed with relatively modest changes."

--NYT ED, 5/29/00

BUSH'S SOCIAL SECURITY PLAN DOESN'T COMPUTE

Kinsley: Chief Component Of Bush's Social Security Privatization Plan Is Stupidity:

"Einstein makes an unexpected appearance in George W. Bush's Social Security proposal: 'Because of the impact of compound interest, which Albert Einstein called the most powerful force in the universe, diversified personal retirement accounts can be expected to earn nearly 6 percent after inflation--almost three times what Social Security now provides.' Einstein was wrong, of course. The most powerful force in the universe is stupidity. Then comes political spin. Compound interest may be third. Class, who would like to point out the error in George's statement? That's right: Compounding affects the amount of return but not the rate. Bush can compound 2 percent as often as he likes, but when he stops, it will still be 2 percent. Increasing the rate of return from about 2 percent to about 6 percent is the essence of Bush's plan to 'save' Social Security. He would do this by allowing people to invest privately some fraction of what they now pay into the Social Security trust fund. Six or 7 percent is the historical long-term return on stocks. This is not, as Bush seems to think, guaranteed by the magic of compounding. But suppose it happens--not just on average but for every individual participant. The numbers still don't add up. First, the comparison between 2 percent and 6 percent is phony. If you think of Social Security taxes as an investment and benefits as the return, it may work out to 2 percent. But that's because current workers are paying for current retirees, not because of where what's left over is invested. As a matter of fact, the Social Security trust fund, in the year ending March 31, earned $56 billion of interest on assets of about $850 billion, which is more than 6 percent. Bush presumes that all the money you put into his 'diversified personal retirement accounts' gets to compound away just for you. But he doesn't say how he'll replace the money you're now paying to cover current retirees. Second, Bush promises to put the current annual Social Security surplus in a 'lock box... to be preserved solely for Social Security--unlike the current administration, which has spent $295 billion of the Social Security surplus on other programs.' It's hard to know what this means. The surplus currently is invested in government bonds. One of Bush's six so-called 'principles' is that 'government must not invest Social Security funds in the stock market.' So would he put it in real estate? Lotto tickets? Does he imagine literally stuffing $2 trillion cash in a safe somewhere? With the government running an overall surplus, it's no longer even metaphorically true that the Social Security surplus is being spent on other current programs. It's being used to finance past deficits – mostly those of President Clinton's two Republican predecessors. Third, Bush spends his putative privatization bonanza again and again. The first thing it must do, of course, is cover its own cost. Assume, as he does, that people may divert 2 percent of income into their private funds. That's about one-sixth of Social Security tax revenues, or $80 billion this year. Next, the arrangement has to close the gap between what the system expects to bring in and the benefits it currently promises. Bush says that gap is $2.9 trillion. But Bush also promises to raise the effective rate of return--or, in other words, to provide a bigger payoff than current benefits. And he says his plan will allow even low-income people to 'build significant wealth' that they can 'pass on to their children.' This last notion is Bush's 'compassionate conservatism' in self-parody: a government program to divert tax dollars so that every American child can inherit money from her parents. Are yacht stamps next? But if that nest egg is supposed to make up for reduced benefits, it can't be left for the kids. And if benefits aren't reduced, while tax revenues are diverted, we've made the solvency problem worse, not better. Fourth, what happens when $80 billion or more each year that used to be lent to the government is invested in the private sector instead? The government must close this $80 billion gap. It could cut spending or raise taxes, but Bush mentions nothing about that. So we must assume that the government simply borrows the $80 billion from someone else. Total government borrowing would remain the same and so would total private capital. The economy would be at best the same size as if the program didn't exist. That means the promised bonanza for Social Security recipients must come at the expense of someone else. Who? Answer: It is the genius who listens to the president say that government bonds are a terrible investment and stocks are a sure thing, and then sells his stocks to buy government bonds. Obviously there is no such single person. But Social Security privatization schemes all do implicitly assume that for every dollar they rescue from the pit of poor returns, the market will supply another dollar eager to jump in. And that this will happen without lowering the return on stocks and raising the return on government bonds, thus defeating the point of the exercise. Both politically and economically, then, Social Security privatization depends on the most powerful force in the universe. Not compound interest." [Kinsley column, Washington Post, 5/24/00]

Ivins: Bush's Social Security Plan "Sounds Like the Man on Late-Night TV Who Sells the Slicer-Dicer":

"The Gore plan is to keep dumping the system's surplus and some general revenue into paying down the national debt. This will have several happy side effects. Eliminating the debt would put downward pressure on interest rates, stimulate economic growth, create jobs and produce more payroll tax money to keep Social Security in the black -- a sort of follow-the-bouncing-ball effect. Bush's plan is to privatize part of Social Security on the theory that money invested in the stock market will earn more than the no-risk bond investments of the current system. He says he wants people to have control of their money and promises that a worker could 'end up with hundreds of thousands of dollars for retirement.' Sounds like the man on late-night TV who sells the slicer-dicer.... Wall Street stands to gain so much from this scheme that it blows the mind. Bush advisers claim that all this can be done for 1 percent of the expected profits, which is ridiculous. Many analysts think that administrative costs alone will eat up the difference between what the current system earns and historical stock market returns. But that's a detail. Here's another detail: Investment fraud jumped 20 percent from 1995 to 1999, according to the Securities and Exchange Commission. Next consider this: What happens if we dump $1 trillion (2 percent of FICA) into a bull market that many analysts think is already overvalued? Whee! Economist Paul Krugman explains what happens 'even if' current stock valuations are reasonable: 'You see, those high returns cited by Mr. Bush -- the returns that are supposed to produce huge gains for workers free to make their own decisions -- are what stock investors got during an era in which people were very leery of stocks, and hence prices were low compared with earnings. Now that people are no longer so nervous, prices are much higher compared with earnings -- and the higher the price you pay for anasset, the lower the rate of return on your investment. [Duh.] So rate of return on stock investments made now will probably be much lower than the returns people got in the past. [Remember, this is the 'optimistic' scenario, which claims that current values are reasonable -- if they aren't, the return will be even lower.] And that means that the proposition that individual investors can expect to do a lot better than the Social Security Administration – so much better that we can wave away concerns about increased risk – evaporates.'" [Ivins column, Fort Worth-Star Telegram, 5/24/00]

Sarasohn: Bush's Social Security Plan Would Subject Retirement Benefits To The Whims Of The Stock Market:

"Last week, Bush opened a major new theme of his campaign, allowing workers to invest a piece of their Social Security payments in the stock market. It's an idea that might look better some days than others.... Except maybe this year. By making Social Security's entry into the stock market a major issue, Bush is betting his campaign on the market going up -- just as if he'd taken the $80 million he's raised and put it all into a nice dot-com IPO. Bush's Social Security plan is bolstered by the widely held faith that the stock market is the upscale equivalent of an ATM, a money dispenser that hardly ever breaks down. If anything happens to change that by November -- such as one of those days (or weeks) when the country is glued to the stock reports and sobbing quietly -- Bush's idea may seem a lot less inviting. In other words, Bush's real running mate is a bull.... One thing to ponder, as we all wait for the market to open -- although the stock market now never really closes, just like any convenience store -- is that Bush's closest economic adviser has been saying for years that the market is too high, and has pulled all his money out of it. Either he's wrong about his money and right about Social Security's, or the other way around." [Sarasohn op-ed, San Jose Mercury News, 5/24/00]