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17 May 2002

Our current howler (part III): Six percent solution

Synopsis: Bush’s basic pitch had a great big problem. And guess what? The corps didn’t care.

Social Security losers
Deroy Murdock, The Washington Times, 5/15/02

Truth in Advertising
Paul Krugman, The New York Times, 5/31/00

Campaigning on Social Security
Editorial, The New York Times, 5/29/00

Social Security: The Phony Crisis
Dean Baker and Mark Weisbrot, The University of Chicago Press, 1999

The press corps’ touted “great debate” fell a bit short of the mark (see THE DAILY HOWLER, 5/15/02). The corps failed to examine the twenty-one countries which had experience with personal accounts. More significantly, it failed to examine the six real-world plans which had already been presented in Congress. How soundly did the press corps nap? Reporters didn’t bother asking Bush if his plan would force a reduction in benefits. How would the hopeful’s “broad principles” work? There was simply no way for a voter to know. As usual, the press corps did what it seems to do best. It avoided getting bogged down in substance.

For the record, at least one more point should be addressed in reviewing the corps’ “great debate.” That involves the press corps’ coverage of a basic Bush claim—the claim that workers could get a six percent return from their personal accounts, not the “dismal” two they’d get from SS. As noted earlier, Candidate Bush routinely made this presentation—a pitch in which he gave the sense that free money was there for the taking. He laid it out in his May 15 speech. “The reforms I have in mind will actually increase [younger workers’] retirement income,” he said. “Right now, the real return people get from what they put into Social Security is a dismal 2 percent a year. Over the long term, sound investments yield about a 6 percent return…A worker who invests even a limited portion of his or her paycheck could, over a career, end up with hundreds of thousands of dollars.” Enthusiasts like Gergen penned pleasing pieces about the large sums individuals could gain.

For the record, Bush’s presentation was built on two claims; each claim was perfectly accurate. It’s true—an individual worker might well earn a six percent return on investments. And a second fact was true as well; the average worker is expected to receive SS benefits which represent the equivalent of a two percent return on the payroll taxes he has paid through his lifetime. Deroy Murdock limned it in Wednesday’s Washington Times: “A typical, two-earner couple born in 1970 can anticipate a 2.24 percent return on their payroll taxes, the Social Security Administration estimates.” Throughout the election, Bush conjoined this pair of facts to make a pleasing presentation. He compared the six percent you could get from investments to the two percent you’d get from SS, and he implied that free money was there to be had if you’d just use them personal accounts.

But why is Social Security so stingy? Why will Murdock’s couple receive the equivalent of a 2.24 percent return from SS? Presumably, the country’s budget reporters all knew the answer: In effect, this is all the program can afford to pay, because the program has past debts and responsibilities for which it has to account. Under Bush’s plan, personal investments might yield nice returns—but those outstanding debts would still exist, and they would have to be paid by the very same citizens who were getting six percent on investments. That six percent would dwindle back down when they had to make good on the outstanding debts. Bush’s “six percent versus two percent” was a comparison of apples to kumquats.

Campaign reporters were surely aware of the problem with Bush’s presentation. In May and June, the point was discussed three separate times by award-winning economist Paul Krugman; his columns appeared on the New York Times’ op-ed page, American journalism’s highest-profile bit of real estate. Krugman explained the point on May 28, then again on May 31. (Krugman: “[L]et me assure you that I too would have no trouble devising a painless plan to save Social Security, if you let me assume that a large part of the system’s obligations would magically disappear.”) The third time allegedly being the charm, he even explained it again on June 21. (Krugman: “[T]he salesmanship surrounding George W. Bush’s Social Security plan is all about the meaningless contrast between the returns that an unburdened individual can get on investments and the implicit return that a very-much-burdened Social Security system can offer.”) Though Krugman never found the perfect way to explain the somewhat confusing conceptual point, every reporter must have known that something was shaky about Bush’s key pitch. For the record, this basic point was also made in a May 29 New York Times editorial. Bush’s key comparison was “highly misleading,” the editorial said; “the [six-versus-two] advantage that proponents cite on behalf of private accounts is an optical illusion.”

In an actual “great debate,” this would have called for discussion. Bush had proposed an historic change in what he himself called “the single most successful government program in American history.” And an honored economist had said, three times, that his key pitch on the matter was hokum. (Krugman: “Mr. Bush’s advisers understand [that] very well, even if the governor does not.”) But so far as a NEXIS search can determine, Krugman’s columns were completely ignored by the rest of the press corps. No reporters questioned Bush about his “six-versus-two” presentation. And no campaign reporter raised this point in dispatches from the road—even as Bush’s claim was being quoted. Free money, anyone? Enabled by the press corps’ indifference, Bush kept telling voters that they could get six percent on their retirement dollar instead of the current “dismal” two. And little effort was ever made to conduct a debate about this great claim. Instead, pundits recited pleasing spin-points about the Texas governor’s bold plan.

Now Donald Lambro says that Bush’s Social Security proposal will dominate the congressional elections (see THE DAILY HOWLER, 5/14/02). And he says that the White House is ready to rumble in support of its free-money plan. Are personal accounts a good idea? That, of course, is a matter of judgment. But voters can’t begin to judge in the absence, yes, of a great debate. Will the press corps be up to the challenge this time? When you look at their napping in Campaign 2000, you can see how hard we’ll all have to work to insist on a worthwhile discussion.

Next (Monday): What did the pundit corps choose to discuss? Insulting the public interest again, Howard Fineman discussed Bush and Gore’s clothes.


The Daily update (5/17/02)

From our “be careful what you ask for” file: What rate of return would investors get if we switched to personal accounts? Some economists think that stocks may not produce the same rate of return in the future as in the past few decades. And of course, if investors go half into stocks and half into bonds, that rate of return comes down again. Both these points cut into the beauty of that “six-versus-two percent” solution.

But then, a wide range of topics gathered dust in Campaign 2000’s “great debate.” Press corps proponents marveled at the rate of return for someone invested in stocks. But how much of those profits would brokers’ fees take? And how much more would be lost if the money had to be turned into an annuity at retirement? (Suggested answer: A lot.) Another point was rarely discussed, although it relates to the topic of today’s HOWLER. Who will actually pay the (massive) transition costs involved in setting up personal accounts?

For the sake of simplification of argument, let’s suppose we switch to a totally “privatized” system. We’d all put their payroll taxes into our personal accounts, possibly getting that rate of return which Candidate Bush warmly praised. But, with our payroll taxes so diverted, who will pay the massive cost of current retirees’ SS benefits? The answer is simple—we will. Indeed, the generation that changes to personal accounts really does pay through the nose. That generation has to set up its own retirement accounts—but it has to pay for the current generation of retirees as well. (Their payroll taxes were spent on the last generation’s retirement.) Some economists say that, on balance, this produces a negative rate of return for the generation which has to effect the transition. But was this discussed in Campaign 2000? Readers! Do you really think that matters so cruel interrupted the corps’ summer slumbers?

Dean Baker and Mark Weisbrot discuss this point in their book Social Security: The Phony Crisis (available from Amazon). They stress the need for a great debate that is a bit more honest:

ALLEN AND WEISBROT: [W]hat is more important than calculating the exact rate of return from privatization plans is recognizing the nature of the deception in the calculations regularly put forward by their proponents…[T]he privatizers highlight (and overstate) the return on the money going into the [personal] accounts, but they completely ignore the large amounts of money that will have to be paid from another pocket to support the transition. By the way, remember that report about the Kasich plan, in which individuals using personal accounts only came out roughly even (see THE DAILY HOWLER, 5/15/02)? Were transition costs part of the calculation which produced that less-than-thrilling result? The corps’ two reports on the plan didn’t say. But we think you can guess at the answer.