Roger Lowenstein has a featured article in this week's NY Times Magazine on Social Security. He is fascinating on the history of Social Security, and provides a useful starting point for those not yet fully enthralled with the debate over Social Security reform. Having wacked his discussion of the "reality" of the Trust Fund in the post below, we will pick through it quickly for some good work and bad.
What's more, there is a strong case to be made that the agency is erring on the side of being overly pessimistic. If its more optimistic projection turns out to be correct, then there will be no need for any benefit cuts or payroll-tax increases over the full 75 years.
This is Kevin Drum's point (busted LA Times link; Bob Somerby excerpts) about the ever-receding doomsday; Lowenstein eventually explains the institutional bias towards conservative projections currentlt gripping the Soc Sec Administration.
Cato, a libertarian policy center founded in the late 1970's, has been arguing for 25 years that Social Security is on the verge of crisis.
This is a cheap shot intended to make critics sound like broken records; eventually, Lowenstein notes that Social security was on the verge of a crisis in the late 1970's, back when Cato said so.
Lowenstein falls short when discussing the CBO evaluation of the Bush Social Security Commission Plan II:
The C.B.O. assumes that the typical worker would invest half of his allocation in stocks and the rest in bonds. The C.B.O. projects the average return, after inflation and expenses, at 4.9 percent. This compares with the 6 percent rate (about 3.5 percent after inflation) that the trust fund is earning now.
...Overall, the plan is gentler toward lower-income seniors than wealthier ones, but all seniors would be poorer than under present law. In other words, absent a sustained roaring bull market, the private accounts would not fully make up for the benefit cuts. According to the C.B.O.'s analysis, which, like all projections of this sort should be regarded as a best guess, a low-income retiree in 2035 would receive annual benefits (including the annuity from his private account) of $9,100, down from the $9,500 forecast under the present program. A median retiree would be cut severely, from $17,700 to $13,600.
First of all, his "absent a sustained roaring bull market" is hyperbole; average stock market returns since 1926 have been well above the levels assumed by the CBO.
Secondly, Lowenstein is a bit confused by the CBO methodology. The CBO does a "risk adjustment" to their projected equity returns, knocking them back down to the rate earned on government bonds before running their "expected" projections. This approach has puzzled the Dead Parrots, Andrew Samwick, and Brad DeLong.
Because of this choice (which Max Sawicky has promised to rastionalize), the CBO presents the odd conclusion that 90% of the time the actual results with personal accounts will exceed the "expected" results. Their graphs also indicate that approximately 75% of the time, the personal accounts will be worth more than the status quo. This is not nearly as gloomy as the results highlighted by Mr. Lowenstein (who we forgive, since we missed this too).
Mr. Lowenstein does a nice job of describing wage indexation versus inflation indexation; he makes me laugh with his implication that Milton Friedman opposed socialism because of ideology rather than economics.