Thursday, April 28, 2005

Bushism #5: Bushisms Go To Bamboozlepalooza

by Tom Bozzo

This one, from Bush's Bamboozlepalooza (TM) event in Texas, does involve mangling of the language, mathematics, or both.
For example, if you're a worker making $35,000 over your lifetime, and your -- the government allows you to take a third of your payroll taxes and sets it aside in a conservative mix of bonds and stocks that earn, say, 4 percent, that money will yield $250,000 over your lifetime, which is a heck of a good nest egg for a lot of folks. That's money you call your own.
Clearly, Harvard Business School will give anyone an MBA. If you earn $35,000 "over your lifetime," you're lucky to find shelter space in lieu of a permanent roof over your head.

But presumably what the president meant was to describe someone earning $35,000 per year over a working lifetime. So let's consider his example.

One third of current-law Social Security payroll taxes is 4.133% of that. Let's also assume that the $35,000 is in constant (inflation-adjusted) dollars, that the 4.133% of $35,000 is invested at the start of the year, and that the 4% return is on top of inflation and compounded annually. Under those assumptions, mathematics you can do in a spreadsheet will show that you'll reach the quarter-million dollar balance — after a 53-year working career. Happy retirement in your early-to-mid 70s, hope none of that time was spent working at Wal-Mart!

Since the Bush plan would take the principal plus a 3% "clawback" out of traditional Social Security benefits, it's highly disingenuous to suggest that the hypothetical worker is actually better off to the tune of $250,000 under privatization.

The Bush quote was en route to promoting the alternative retirement plans of some Texas municipalities, which are sometimes advanced as a model by privatizers, but which actually constitute no privatization miracle at all. (I've been meaning to post on the subject for a while.

For one thing, the cost of the Texas alternative plans is just under 14% of payroll, versus 12.4% for Social Security; Bush has said that the tax rate is absolutely, positively, foot stomp, the one parameter of the existing system that won't change under his watch.

Then there's the investment mix, which is deliberately conservative, to the extent that the Texas plans don't yield the 4% over inflation from the hypothetical following Bush's example. Earning the Texas plans' 3% historical return on top of inflation, instead of 4%, knocks the 53-year nest egg down by 27%, yielding $1,160/month in a partly inflation-adjusted annuity at age 70 according to the Thrift Savings Program's current terms. The Texas plans' guaranteed return is a mere 0.75%-1% on top of inflation. The guaranteed minimum return also trades away the prospect of earning the outsized historical stock market returns that privatization proponents use to promote the greed of would-be marks.

The bottom line is that low earners and middle earners are likely to be better off under traditional Social Security. Shockingly, high earners will tend to benefit from the alternative plans, according to a 1999 GAO analysis. So, the plans would make great policy if everyone were above average.

See also Economist's View for mention of a more recent study of the plans.
Congress will have to stop their wrangling and haggling when it comes to increasing the minimum wage by a few cents, if the 35K goal is to be met that is.
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