Wednesday, May 4, 2005

Will Bush's proposal slash your benefits?

Commentary by David Reinhard


By DAVID REINHARD

David Reinhard

It was a Friday afternoon forum on Social Security reform at Lewis & Clark Law School. The discussion was civil and high-toned, all sides were represented, and questions from faculty and students were informed and probing. U.S. Rep. Earl Blumenauer was there, offering a polished recital of the House Democratic caucus' "No, a thousand times no" stand. But then he made his strongest argument: President Bush's reform proposal would mean whopping benefit cuts for future Social Security recipients. You could go to his Web site and look it up -- and calculate your own losses.

Truth to tell, it took a bit of the kick out of the post-forum reception. If Bush's Social Security reform plan caused cuts of up to 50 percent in future benefits, what was the point? Maybe the thing just didn't pencil out. Blumenauer was a congressman, after all. He had to know what he was talking about with such bow-tied crispness -- and he had a Social Security calculator on his Web site. The young law students who face Social Security's future insolvency had to be impressed. The fact is that happy hour wasn't so happy that Friday for this supporter of Bush's personal retirement accounts.

In truth, the Democratic leadership's "Social in-Security" calculator -- get it? Social in-Security -- does show cuts under the Bush proposal. You can go to the calculator (democraticleader.house.gov/SScalc), plug in your birth year and salary and take in the carnage. For a 27-year-old worker making a median salary of $21,992, the promised Social Security benefit is $15,130. According to their calculator, the yearly benefit under Bush's plan would be $10,614 -- a loss of $4,516, or 30 percent.

But a FactCheck.Org examination of the Democrats' calculator reveals how they achieved their Bush "cuts." It turns out that the assumptions underlying their calculator are, well, calculating. It assumes average stock returns of only 3 percent over inflation. The actual historical average, by contrast, is almost 7 percent. The calculators' concoctors say this is the same assumption the Congressional Budget Office used. Not so. The CBO assumes a 6.8 percent gain. Plugging in a 3 percent gain is a real downer, since the success of Bush's private accounts is built on long-term stock market gains.

But the Democratic calculators' concoctors aren't just low-balling the yields of Bush's retirement accounts. They've low-balled the other component in Bush's plan: future Social Security benefits. They assume Bush would cut all future benefits by tying them to prices rather than faster-rising wages. In fact, Bush has backed no such change in the current system.

"[T]he calculator is rigged," FactCheck.org concluded. "We find it is based on a number of false assumptions and deceptive comparisons."

What happens when you plug in the Social Security Administration's more realistic assumptions in estimating the Bush plan's impact? The Heritage Foundation did that, using a blended 4.9 percent rate of return for the personal accounts component to reflect a mix of corporate equity index funds and corporate and government bonds. A 27-year-old woman earning $21,992 would reach retirement with two options: She could use her personal account savings to buy the largest annuity possible; this would give her a yearly benefit of $19,332. Or, if she wanted her own nest egg, she could buy an annuity to match the benefit she would have had if she'd not opened a personal retirement account. This would give her a $16,872 yearly benefit and her own nest egg of $29,583.

Precise comparisons are not possible with the 27-year-old worker making $21,992 plugged into the Democrats' "Social in-Security" calculator mentioned above. It doesn't factor in sex, which matters in calculations. Heritage also assumes Social Security benefit cuts that current law requires after the Social Security trust fund runs dry. Even so, a 27-year-old woman would do very nicely under the Bush proposal. She's certainly not facing a 30 percent slash in benefits.

Finally, there's a fundamental flaw at the other end of the Democrats' draconian Bush cuts calculator. It assumes Social Security benefits will continue without change as the system moves toward insolvency. Yet, as Charles Grassley, U.S. Senate Finance Committee chairman, said at a recent hearing, "Doing nothing is not an option because doing nothing is a cut in benefits."




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