>[this may be getting too complicated for the U.S. political system
>to deal with - Weisman's a good reporter, and if he can't get this
>straight, can your average Congressperson?]
>
>Washington Post - February 3, 2005
>
>Participants Would Lose Some Profits From Accounts
>
>By Jonathan Weisman
>Washington Post Staff Writer
>
>Under the White House Social Security plan, workers who opt to
>divert some of their payroll taxes into individual accounts would
>ultimately earn benefits more than those under the traditional
>system only if the return on their investments exceed the amount
>their money would have accrued under the traditional system.
>
>The mechanism initially detailed by the Washington Post in today's
>editions and posted earlier on the Post's Web site was incorrect.
>
>The original story (available here) should have made clear that,
>under the proposal, workers who opt to invest in the new private
>accounts would lose a proportionate share of their guaranteed
>payment from Social Security plus interest. They should be able to
>recoup those lost benefits through their private accounts, as long
>as their investments realize a return greater than the 3 percent
>that the money would have made if it had stayed in the traditional
>plan.
>
>That 3 percent level is the interest rate earned by Treasury bonds
>currently held by the Social Security system.
>
>The Post mistakenly reported that the balance of a worker's personal
>account would be reduced by the worker's total annual contributions,
>plus 3 percent interest. In fact, the balance in the account would
>belong to the worker upon retirement, according to White House
>officials.
>
>"You'll be able to pass along the money that accumulates in your
>personal account, if you wish, to your children . . . or
>grandchildren," Bush said in his State of the Union address. "And
>best of all, the money in the account is yours, and the government
>can never take it away."
>
>What Bush did not detail is how contributions in the account would
>reduce workers' monthly Social Security checks. Under the system,
>described by an administration official, every dollar contributed to
>an account would be taken from the guaranteed Social Security
>benefit, with interest.
>
>"The person comes out ahead if their personal account exceeds a 3
>percent real rate of return, which is the rate of return that the
>trust fund bonds receive," the senior administration official said.
>"So, basically, the net effect on an individual's benefits would be
>zero if his personal account earned a 3 percent real rate of return.
>To the extent that his personal account gets a higher rate of
>return, his net benefit would increase."
>
>If a worker sets aside $1,000 a year for 40 years, and earns 4
>percent annually on investments, the account would grow to $99,800
>in today's dollars. All of that money would be the worker's upon
>retirement. But guaranteed benefits over the worker's lifetime would
>be reduced by approximately $78,700 -- the amount the worker would
>have contributed to Social Security but instead contributed to his
>private account, plus 3 percent interest above inflation. The
>remainder, $21,100, would be the increase in benefit the worker
>would receive over his lifetime above the level he would have
>received if he stayed in the traditional system.
>
>Under the system, total benefit gains may be minimal. The Social
>Security Administration, in projecting benefits under a partially
>privatized system, assumes a 4.6 percent rate of return over
>inflation. Thus gains in an account would be offset by a reduction
>in guaranteed benefits equal to 70 percent of the account's balance.
>
>The Congressional Budget Office, Capitol Hill's official
>scorekeeper, assumes a 3.3 percent rate of return. Under that
>scenario, the full amount in a worker's account would be reduced
>dollar for dollar from his Social Security checks, for a net gain of
>virtually zero.
>
>If investments earned less than 3 percent a year above inflation, a
>worker would do worse in total benefits than he would have done in
>the traditional system.
>
>In effect, said Democratic economist Peter R. Orszag of the
>Brookings Institution, the system works like a loan, in which the
>government grants workers 4 percentage points of their payroll tax
>to invest in stocks and bonds. The loan would have to be paid back
>with interest out of workers' monthly Social Security checks.
>
>But Robert Pozen, an investment executive who served on the
>president's 2001 Social Security Commission disputed that
>characterization. A worker is simply paying less into the system so
>he gets less back.
>
>"This is in no way a loan," Pozen said.
>
>Supporters say the system is far better than what had been
>incorrectly described by the Post. Between withdrawals from a
>personal account and a Social Security check, total benefits would
>be the same, whether the loan repayment comes from the account or
>from the guaranteed benefit. But by leaving the balance of the
>account untouched, the White House would impart a sense of ownership
>in the economy, said Stephen Moore, a conservative Bush supporter
>and author of a book on the president's ownership society.
>
>
>
>___________________________________
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-- "Burke ever held, and held rightly, that it can seldom be right toŠ sacrifice a present benefit for a doubtful advantage in the futureŠ. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appearŠ. We can never know enough to make the chance worth taking. There is this further consideration that is often in need of emphasis: it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transitionŠ"
--John Maynard Keynes
____________________ J. Bradford DeLong Department of Economics U.C. Berkeley, #3880 Berkeley, CA 94720-3880 (510) 643-4027 delong at econ.berkeley.edu http://www.j-bradford-delong.net/