Social Security: Jane Bryant Quinn v. Cato
I normally don’t read Ms. Quinn but the Cato critique made me take a look. Ms. Quinn’s premise is:
What’s more, you’ll be getting a double cut in Social Security benefits—a fact that the White House hasn’t exactly advertised. Investment returns from private accounts can potentially make up for one of the cuts, but they’re unlikely to cover both … Certainly, something must be done to square Social Security’s promises with the taxes the public is willing to pay. Today’s program is affordable in something close to its current form, but not if tax cuts and other spending matter more. Bush wants to make his tax cuts permanent, at a long-term cost to the budget that’s triple the cost of making Social Security solvent again (the estimates come from Social Security and the Congressional Budget Office). So we’re talking priorities, not money: tax cuts versus the safety net.
As Ms. Quinn tries to explain the details, Cato objects:
As this debunker has pointed out many times, getting less back in benefits for putting less money in to start with is not a cut. The money that you aren’t paying into the system is going into your PRA and will be used to pay your monthly retirement benefits just as though it had been paid into the traditional system with one key exception: the money in your account is likely to earn a much higher rate of return above inflation than it would have in the traditional Social Security system-even the left-leaning Center for American Progress predicts a 4.6% return above inflation in a portfolio with 50 percent stocks and 50 percent bonds. That people continue to insist that this diversion of funds represents a “cut” in benefits speaks only to the desperation of anti-reformers. The second claim Quinn makes is that based on the estimates of one economist, young people would only break even or make money with PRAs 80 percent of the time if invested in a portfolio with 50 percent stocks and 50 percent bonds. Given that conservative ratio of stocks to bonds, 80 percent is quite phenomenal. Young people, however, would likely not start out with such a conservatively invested account.
The Cato “rebuttal” is dishonest in two ways. The first comes from its premise that the reduction in benefits equals the reduction in what a worker puts into the Trust Fund. If that were true, I would not be calling the Bush plan for Soc. Sec. deform a backdoor employment tax increase. But if the Bush plan were to reduce benefits by only the reduction of what we put in, Bush would have no means for solving the General Fund crisis, which is Ms. Quinn’s point.
The second piece of Cato dishonesty forms its attack on Robert Shiller’s paper. Cato is pretending that households would wish to take on more risk for extra return, which is their infamous free lunch claim. Maybe they should consult with Brad Plumer and the rest of our No Free Lunch Chorus.