•Press Release Health and Social Programs Inequality
June 14, 2000
Consistent Projections of Stock Returns Reduce Value of Individual Accounts by Half
For Immediate Release: June 14, 2000
WASHINGTON, DC– The Center for Economic and Policy Research (CEPR) has released a new analysis of the Social Security proposal put forward last month by Governor George W. Bush. The analysis was done by CEPR's co-director Dean Baker, co-author of the most widely-read policy book on Social Security– Social Security: The Phony Crisis (University of Chicago Press, 2000) The analysis builds on an earlier study by the Century Foundation, with the major difference being that the CEPR study applies a set of projections for stock returns which are consistent with the Social Security trustees’ projections for profit growth. The CEPR study finds that when consistent assumptions for stock returns are used in the analysis, along with realistic assumptions on administrative costs and the cost of purchasing annuities, the value of the individual accounts that Governor Bush proposed may be less than half of what the Century Foundation study has projected.
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The study also examines the impact of administrative costs and the purchase of annuities on the accumulations in individual accounts. The CEPR study shows that realistic estimates of the administrative cost of the Bush plan will reduce the accumulations in the individual accounts by between 11 and 18 percent compared with the assumptions in the Century Foundation study. Similarly, the Century Foundation study assumed that workers could turn the money in their account into Social Security-like annuity payments, at zero cost. Research indicates that in private markets, annuities generally cost between 10 to 20 percent of the value of accounts.
When more realistic estimates of administrative costs and the cost of purchasing annuities are included in the analysis, along with the consistent projections of stock returns, the value of the benefit provided by the individual accounts is approximately half of what the Century Foundation study has projected. This will leave virtually all workers worse off than under the current system, with the biggest losers being low-income workers and married couples receiving the spousal benefit.