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May 11, 2005

The White House Mounts a Feeble Defense of Its Social Security Plans

John McKinnon writes:

WSJ.com - White House Defends Reining in Pensions of Affluent: The White House... releas[ed] an internal analysis showing their payouts still would be higher than those the Social Security system can actually afford by the middle of the century.... The White House analysis sought to further highlight the upside of their proposal. It showed that by 2050, middle-income retirees would be receiving about $1,532 a month in today's dollars under Mr. Bush's proposals, compared with the $1,208 that the system would actually be able to pay. That includes the effect of Mr. Bush's proposed scaling back of promised benefits, and also the prospective investment returns from the personal retirement accounts he wants to create using part of Social Security's payroll-tax revenues. The administration assumes an inflation-adjusted return of 4.6% on personal retirement accounts. The promised benefit is $1,670 in today's dollars -- but Mr. Bush and other administration officials note that the system is now projected to go bankrupt in 2041, meaning that those benefits can't be paid without a payroll-tax increase that could cripple the economy....

Democratic critics... noted that the plan that serves as the model for Mr. Bush's proposal would only delay the Social Security system's insolvency to 2047.... A senior administration official said the administration plans to work with Congress to find additional ways to make the program completely solvent, so didn't reduce the payout under its proposals...

Three interesting things here:

  1. The last sentence is an endorsement of tax increases to close the Social Security funding gap: you can't pay higher benefits than current-law revenues generate without additional revenues. That's new. That's the big news here--but McKinnon underplays it.
  2. This "payroll-tax increase that could cripple the economy." Where does that analytic judgment come from? I pity the poor (anonymous) fool that made it, and McKinnon for swallowing it: he should do better.
  3. The 4.6%-above-inflation expected return on private accounts: that's simply not a sensible forecast when inflation-protected Treasury bonds are yielding 1.8% per year, and when dividend yields are as low as they are today. Once again, McKinnnon should call them on this: demand at the very least numbers from more realistic scenarios with lower private-account returns.

Posted by DeLong at May 11, 2005 08:46 AM