Miscalculation

The Democrats are floggin a calculator to show the purported disadvantages of Bush's social security privatization plan.

The Detailed Explanation of Calculations and Assumptions" included on the page is detailed, yet doesn't list the actual calculations in any depth.

Patrick Ruffini takes it apart.

Ruffini's critique:

• Absurdly Inflated “Promised” Benefits. The Reid calculator projects your “promised” Social Security benefit. What they don’t tell you is that it’s a promise that there is absolutely no way we can pay for under the current system. The Reid “calculator” doesn’t acknowledge what happens when your benefits get slashed by around 25% when the trust fund is exhausted – or the effect of phasing in these cuts earlier. Political Calculations explains why Social Security’s real rate of return will continue on its inexorable path down to zero, and then turn negative, a fact that acknowledged by the far more sophisticated calculator you see posted below.
  
• Wage Indexation. The Reid calculator simply assumes that the wage indexation of benefits will be done away with by inflation indexing. But that’s just one option on the table. Given the wild leap of faith implicit in this assumption, you would think the Reid calculator would be up-front about the specific dollar effect of turning wage indexing on or off. But they aren’t. I wonder why.
  
• Pessimistic Rates of Return. About the only thing the calculator is transparent about is the projected real rate of return on personal retirement accounts – just 3%. But the last time the government examined this question in detail – before the late ‘90s boom – it found the real return on stocks to be 7%. I assume a conservative 4.5% real rate of return on PRAs. By going with 3%, the Reid calculator artificially depresses your PRA-added benefit by 15%, a good chunk of your putative “losses.”
  
• Fuzzy Math? Ironman, who devised the calculator, e-mails with another point of interest:

  If someone born in 1975 and someone else born in 2005 have lifetime average annual salaries of $30,000, and the "Promised" Social Security annual benefits are adjusted to 2005 dollars to eliminate the effects of inflation, how come the dollar values of their "promised" benefits are different?

• 2 + 2 = -17.5! Assume average real wage gains of 2% (the theoretical, best-case rate of return in Social Security -- which will be unsustainable by 2010 based on the program cash-flow) and real rates of return on PRAs of 4.5%. Under Bush’s plan, 37.7% (4 of 10.6 points) of your retirement payroll taxes are set aside for PRAs. What happens when you substitute a 4.5% investment for a 2% investment on the PRA side, and take a 2% investment down to 0% on the remaining 62.3% (to account for wage indexing). Your gains from PRAs outweigh your losses from inflation indexing by about 3 to 2. Even under Reid’s concocted, cherry-picked scenario, his numbers don’t add up.

Ruffini also includes a calculator he ays provides more realistic results, and includes his calculations.

Posted by Mitch at February 18, 2005 07:13 AM | TrackBack