November 9, 2004
Bush Plan Cuts Social Security, Without Much "Ownership"
Proposed Cuts in Benefits Dwarf Potential Gains From Private Accounts
Statement by Dean Baker and Mark Weisbrot
For Immediate Release: November 9, 2004
Contact: Debi Kar, 202-387-5080
Dean Baker: 202-332-5218
Mark Weisbrot: 202-746-7264
The day after George W. Bush was declared the winner of the 2004 Presidential election, he announced plans to move forward with a proposal to partially privatize Social Security.
“To the President, “ownership” means losing 40 percent of your Social Security benefits, and getting a few thousand dollars in a private account in exchange. Most people would prefer a secure retirement to that sort of ownership,” says Dean Baker, economist and co-director of the Center for Economic and Policy Research.
“If the public realized the truth about Social Security – that the program is fundamentally sound, and that there are no big gains to be had by investing Social Security money in the stock market – there would be little public support for privatization,” added Baker.
Bush’s proposal will phase in benefit cuts so that younger workers will see larger cuts. As an example, a worker who is 50 today would see a cut of about 7 percent in the benefits they are scheduled to receive, whereas a worker who is 30 today would see a cut of approximately 25 percent in their benefit. A worker who is currently 20, and can expect to retire at age 65 in 2050, would lose approximately $200,000 in benefits under the most widely cited proposal from President Bush’s Social Security Commission.
These benefit cuts are supposed to be offset by investing Social Security taxes in the stock market. But the 6.5 percent rate of return on stocks projected by the President’s Commission is mathematically impossible given current price to earnings ratios and projected profit growth. The stock return consistent with the price to earnings ratio and the Social Security trustees’ profit growth projections is just 4.5 percent, not far above the 3.0 percent return projected for the government bonds held by Social Security. Simple arithmetic shows there is no bonanza from investing Social Security money in the stock market. Increased costs from administering these new individual accounts will further diminish this slightly higher return.
Furthermore, Bush’s proposal rests on the premise that the current Social Security system is broken and needs to be fixed. This is false.
According to the Social Security Trustees' Report, the standard source for economists and the Bush Administration, the program can pay all promised benefits without any changes for the next 38 years. Beyond that, it could still pay a benefit larger (in real, inflation-adjusted dollars) than beneficiaries enjoy today – indefinitely.
Dean Baker and Mark Weisbrot are co-authors of Social Security: The Phony Crisis (2000, University of Chicago Press). See www.cepr.net for more information.