Somebody's Crazy

Somebody is not up to their job.  Bob Somerby of the Daily Howler thinks that Richard Stevenson of the NY Times is not capable of guiding a discussion of Social Security; Matt Yglesias, taking Stevenson at face value, thinks Republicans must be crazy.

OK, those two positions are not mutually exclusive, but my firmly held opinion is that Somerby is right, the Times blew it, and Matt is overly reliant on their poor reporting.

What is going on?  The 2001 Bush Commission on Social Security described Plan II, which seems to be the foundation for the current privatization effort, and they tell us how they might adjust the level of benefits to reflect contributions to personal accounts.  Now, in your heart, you feel that, if a person puts half their contribution in a personal account, their benefit should be cut in half.  Yes, but... what about folks who have been contributing for a few years, and are changing over?  We can't just ignore their past contributions, can we?  Ahh!  Since we are switching over from a sytem in progress, the mechanics get tricky.

SO, what to do?  As described by the Bush Commission on Social Security (Plan II), as a worker contributes funds to a personal account, the Soc Sec Administration tracks a "notional balance" based on that contribution; this notional balance grows at the Treasury borrowing rate (less one percent).  When the worker retires, the notional balance is subtracted from the calculation of total contributions to arrive at the retirement annuity.

So, there is a mechanism to reduce future benefits as workers contribute to personal accounts.  It is just a bit complicated, and more than Mr. Stevenson thought his readers could digest.  (The CBO explains it in their 2004 letter to Rep. Craig.)

But with that in mind, my assumption is that the Republican plan that Matt Y thinks is daft is simply Plan II with a larger cap (or no cap) on personal contributions.  Matt's theory that Reps are crazy may have other evidence, but I don't think he should rely exclusively on this Times story to make the case.

UPDATE:  Brad DeLong thinks the Times should include in its price a subscription to the Psychic News Network.

Comments

[Jor]

No faith in the media to get this anywhere near right. As others have mentioned, how many stories can't tell the difference between 4 % and 4 percentage points.

[Meep]

I have absolutely no faith in the media to report this correctly, as they can't even report simple statistical concepts (correlation v. causation) correctly. The math involved in this issue is not trivial -- this is why actuaries get paid so much (disclosure: I'm in training to be an actuary, and I work on retirement plans mainly).

There is a way for actuaries to figure out how much to credit prior contributions. The Social Security Administration has many able actuaries, and I would hope those in Congress (and the Bush admin) consult with them to draw up any new benefit rules. Actually, that's not so much a hope as =I=know= they'll be consulted if any bill is drafted. The grandstanding for CSPAN in hearings will likely be about the solvency of SocSec, but behind the scenes, aides will need the help in hammering out benefit cuts -- because you can't simply pro-rate contributions. That's not how benefits are calculated now.

If you want, you can go to the website for the Chief Actuary of the SSA, as it has a complete description of how benefits are calculated, and some examples done fully. The math is elementary if you've got the whole salary history for an individual, but analyzing the effects of contribution changes to make it "fair" is not elementary. Which reminds me - I never did finish making that Social Security benefit calculator. Hmmm. Maybe I should do it today.

[Patrick R. Sullivan]

And since it is relatively easy (you don't need actuaries to do it) to calculate the value of past contributions and accrued interest on them, it would also be easy to take the next logical step.

Which would be to establish personal accounts with the amount calculated, for each 'contributor', at the financial services firm of their choice. I.e. give the Paul Krugmans what they claim to be true; SS bonds that are real economic assets.

[Cecil Turner]

Apparently the contentious bit is this paragraph by Stevenson:

Those Republicans say that diverting money that would otherwise go to pay benefits into the private accounts would lead to a sharp spike in the budget deficit in the short run.

To which Somerby rejoins:

To us, this makes no apparent sense. Why would Sununu’s approach only lead to a spike in the budget deficit "in the short run?" If Sununu takes large sums away from payroll taxes, but keeps on paying the scheduled level of benefits, this would presumably lead to gigantic deficits as far as the eye can see.

Okay, maybe I'm missing something, but it seems to me Stevenson has it essentially correct. The whole idea of private accounts is that contributions plus interest accrued will pay for the benefit in the long term . . . though the transition costs are obviously high (and perhaps Somerby means they're so high that we'd never be able to pay off the increased debt--but he seems to be saying there's a direct tax/benefit ratio--which for private accounts isn't so). In other words, Sununu's plan "addresses the problem" by paying some of the unfunded liability with market-accrued interest.

There doesn't seem to be any advocates for complete privatization. But if there were, after the initial transition, the accounts would be self-sustaining, right? And if so, and everyone completely transitioned to the private accounts, the eventual long-term effect on the rest of the budget would seem to be zero. Which would appear to support Stevenson's uncritical reporting about the "wary Republicans'" contention that the spike is temporary.

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