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January 21, 2005

John Berry Is Not Happy with George W. Bush

Writing for Bloomberg:

President George W. Bush's assertions that Social Security faces a crisis and is ``flat bust, bankrupt'' are patently false. Bush and other administration officials are greatly exaggerating potential problems facing the program to push through changes that would undermine the most successful social insurance program in the nation's history.

The system is so far from crisis or bankruptcy that the truly prudent course at this point most certainly would be to make no changes in Social Security at all. Wait and see if even under conservative assumptions the date at which the system's trust fund would be exhausted keeps receding.

In 1994, Social Security trustees put that date at 2030 using their intermediate projection, the middle one of three. By 2004, 10 years later, the date had been pushed out 12 years, to 2042. And even after that, 75 percent of promised benefits could still be paid.

That's neither a looming crisis nor bankruptcy.

Bush has no intention of being prudent. Instead, he obviously wants to undermine confidence in the program to create a political climate in which Congress will approve diverting a portion of the payroll tax that funds Social Security to individual accounts for workers with the money invested in equities and corporate and government bonds. By assuming unrealistically high returns on equities, the private accounts are being sold as a way to make up for the alleged inability of Social Security to pay promised benefits in the future. Unfortunately for Bush, earlier this month a memo written by Peter Wehner, his director of strategic initiatives, appeared.... ``You may know that there is a small number of conservatives who prefer to push only for investment accounts and make no effort to adjust benefits -- therefore making no effort to address (the) fundamental problem'' in Social Security, Wehner said. ``In my judgment, that's a bad idea.'' In other words, private accounts would not fix the allegedly ``bankrupt'' system. Since no one working for Bush is about to suggest taxes be raised, the only alternative would be to reduce benefits. All the Washington chatter is about freezing the real value of benefits at their present average level of about $1,200 a month. Currently, benefits are indexed annually for both inflation and real wages....

Obviously, the real value of today's benefits is far higher than in 1940. On the other hand, those benefits replace roughly the same share of workers' earnings at retirement as they did many years ago. In other words, benefits have increased over the years reflecting the enormous gains in the nation's standard of living. In a speech on Dec. 18 before the Council on Foreign Relations in Washington, N. Gregory Mankiw, chairman of Bush's Council of Economic Advisers, addressed this point. ``A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars. In other words, even after adjusting for inflation, today's 20-year-old worker is promised benefits that are 40 percent higher than what his or her grandparent receives today,'' Mankiw said.

Well, among other things, that would be a significantly smaller increase in real benefits than has occurred over the past 45 years. And if the real value of benefits were frozen over an extended period of time, public support for Social Security undoubtedly would be undermined. Some advocates of privatization of Social Security readily acknowledge that is their goal, and some of them have criticized Bush for not being bold enough in moving in that direction. Interestingly, Mankiw made no mention of private accounts in his speech. In closing, though, the CEA chairman derided everyone who questions the administration's claims about its finances.

``As the nation debates alternative proposals, you should be careful to avoid the sophistry of those opposed to reform,'' he cautioned. ``In particular, be wary of those who argue that there is no Social Security problem or that only small changes are needed to address it. The truth is that Social Security faces fundamental financing challenges.''... don't let the Ostrich Caucus convince you to put your head in the sand,'' he said. Well, the Ostrich Caucus includes some very knowledgeable economists such as Federal Reserve Governor Edward M. Gramlich, who headed a Social Security advisory commission a decade ago and believes that relatively small changes are needed.

Or one could read last year's Social Security trustees report which, as usual, provided three alternative projections -- projections, mind you, not forecasts -- of the system's financial future. One of them showed it fully solvent for 75 years.... Compare the low-cost assumptions listed first below with the intermediate assumptions:

-- Unemployment: 5.5 percent vs. 5.8 percent.

-- Productivity Growth: 1.9 percent vs. 1.6 percent.

-- Increase in Real Wages: 1.6 percent vs. 1.1 percent.

-- Fertility Rate: 2.2 children per woman vs. 1.95.

-- Rate of Decline in Mortality: 0.33 percent vs. 0.71 percent.

-- Immigration: 1.3 million vs. 900,000....

What Bush, Mankiw and others are touting as certain disaster is not certain at all....

Posted by DeLong at January 21, 2005 11:34 AM


"Bush has no intention of being prudent."

Indeed. That's why Bush should never be referred to as "conservative". There isn't a "conservative" bone in the man's body. "Reactionary" fits the bill.

Posted by: General Glut at January 21, 2005 12:13 PM

If only he were still back at the Washington Post writing such things.

Posted by: Billmon at January 21, 2005 12:14 PM

I would put money on Bush's major domestic 2nd term policy agenda being dead, before his term has even started. Let's do some gloating about it-a victory like this, our first, wounds him, and will open the way to more reverses. Kudos to Krugman, the liberal bloggers, without whom Bush might have been able build momentum.

Posted by: Bob H at January 21, 2005 12:23 PM

"Since no one working for Bush is about to suggest taxes be raised, the only alternative would be to reduce benefits. All the Washington chatter is about freezing the real value of benefits at their present average level of about $1,200 a month."

The focus will be on changing the nature of indexing to reduce Social Security benefits in a way subtle enough that it may not be understood the benefits are being reduced.

Posted by: anne at January 21, 2005 12:35 PM

I know that SS reform is not a time for subtle arguments, but has anyone tried the intergenerational equity approach of asking why it is that future generations should bear the burden of benefit cuts, but will still be asked to pay the taxes to pay the bonds that will finance benefits for the more immediate retirees? Their obligation to pay the benefits of the near-term retirees is just moved from the SS system to general taxation. It's perhaps just a corollary of the fact that there's always votes into dumping liabilities, even certain ones, further into the future.

Posted by: P O'Neill at January 21, 2005 12:42 PM

Yet... if we claim that Bush isn't a REAL conservative, then aren't we conceding to the right that conservatism is a virtue? You wouldn't find Republicans claiming a Democrat they hated wasn't a REAL liberal. On the contrary.

Posted by: Julian Elson at January 21, 2005 02:35 PM

Can someone convince me that Greg Mankiw isn't the most evil person on the face of the Earth?

At least the others can plausibly plead ignorance)

Posted by: Michael Carroll at January 21, 2005 04:14 PM

Julian, my counter-argument would be that adherence to one's principles is the virtue. Bush is not a true conservative because Bush has not been faithful to the principles of true conservatism that he allegedly follows. Or something like that...

Posted by: M. at January 21, 2005 04:51 PM

Bob H - please hold your glee. A battle has been won. We must be vigilant to find strategy to win the war.

P O'Neill: Yes, this should be pointed out to everyone under 40.

These folks get to pay three ways.

First, their benefits get slashed, by 30% or more. They'd be slashed more than if we simply do nothing and let the trust run out of money.

Second, if they do opt for a private account, they'd have to pay margin interest on the account through their entire working lives. They'd have benefits reduced by the amount of money put into the account, plus interest charged at the Treasury bond rate.

I don't think you can find any reputable financial adviser, anywhere, who would recommend to a young person that they should take out a margin loan throughout their working lives so they can invest the lowest-risk portion of their retirement security funds in the stock market.

Third, they'd get stuck paying back the "transition debt", which the President's own economic report to Congress last year said would reach 23% of GDP around 2036.

Finally, though the debt would be held by the "general fund" through the transition, the long term plan is to get payroll taxes to pay the debt back, along with interest. And this debt, unlike the treasury bonds held by the Social Security trust, would be publicly held, so even conservatives want it repaid. And you can bet conservatives in the future would want to get even and make the generations working from 2050 till 2075 or so pay the funds back out of payroll taxes, rather than from general revenues.

So, future generations would have to pay back the debt out of payroll taxes. Payroll taxes would be used to pay back interest on the debt, rather than paying out benefits.

Good scam, eh?

Posted by: Charlie at January 21, 2005 08:21 PM

[comment spam]

Posted by: at January 21, 2005 11:00 PM

There is a really easy solution: letting 400,000 more immigrants in every year would make social security solvable. Why doesn't anybody talk about this?

Posted by: Peter at January 22, 2005 05:58 AM

We know that the money that the present day variety of immigrants pay into social security on a national level is less than the amount of money that immigrants on a local level take out of school budgets.
The only category of immigrants that make a profit for our society on a taxes vs services level are college educated ones, predominantly European, Chinese, and Indian (from whatever country), and that these are the ones that compete with top quintile people for jobs.
So we could solve social security by bringing in lots of people to compete with YOU for work...

Posted by: walter willis at January 22, 2005 08:53 AM

Because the country is just too good for those johnny-come-latlies.

Posted by: sm at January 22, 2005 08:57 AM

The problem with Berry's argument is that for social security to remain solvent for the long term requires that every one of his variables go in the right direction. Whether this is even internally consistent is worth thinking about, but the larger question is whether one should delay action on reform in hopes of pulling the equivalent of a royal flush in poker. The SS trustees performaed a stochastic analysis of these variables, finding there is a roughly 1-in-100 chance of the program remaining solvent for 75 years without any policy change. Given the chances of solvency without policy action are so small and the costs of action only rise with time, why not act sooner rather than later?

Posted by: Anonymous at January 22, 2005 09:10 AM

[more comment spam]

Posted by: at February 7, 2005 04:37 AM

Posted by: at February 7, 2005 04:40 AM