Max Sawicky has another excellent post this time commenting on what seems to be a revival of Model 2 from the Bush Social Security commission. Little Nell is a typical person born in 2000. You know – one of those children that Bush wishes to “save” the Social Security system for. To save further ado, let’s have Max take the microphone:
In Table 2 of this study, we get estimates of benefits resulting from this approach. Since it’s all about the kids, we should start with the impact on what’s called the “10-year birth cohort starting in year 2000.” Kids born after January 1, 2000. We focus on the middle of the middle, as far as income distribution goes (“median in middle household earnings quintile”). If Little Nell is this type of person, in retirement she would be due $26,400 a year in benefits annually under current law. This would require some kind of infusion into the Trust Fund after 2052 (when CBO says it runs a shortfall). With no such infusion, alas Little Nell can only be paid $19,900 (everything here is constant 2004 dollars). (The same type of person retiring today — “the 1940 birth cohort” — gets $14,900.) When you include the returns to the individual accounts and “price indexing” of benefits, Little Nell’s benefit is . . . $14,600. SHE DOES WORSE THAN UNDER THE “BANKRUPT” TRUST FUND! Way worse! Can you hear me now? She even does worse than a current retiree.
We hear you Max – now let’s make sure the public does. On another front, many thanks to David Altig for this post:
The problem is that the comparison relates to a hypothetical world where we can start from scratch — choose a pay-as-you-go (PAYGO) social security system or a system of private accounts. That, of course, is not the world we live in, and things begin to look different when we factor in what has to happen as we make the transition from a PAYGO scheme to a privatized scheme.
David’s point is correct. There are differences between PAYGO systems v. defined contribution systems. There are also differences between pre-funded defined benefits systems and the system we had before the Reagan-Greenspan reforms. In fact, there are lots of issues we can be talking about in the Social Security debate. But the Bush crowd is not talking about anyone of them. All they are doing is faking a crisis to divert Little Nell’s retirement fund to pay for more tax cuts on capital income as they pretend there is some free lunch. I’m glad David agrees that this free lunch claim is spurious.