2005 March 03 Thursday
Bush Social Security Proposal Becoming Unpopular

The Bush Administration's proposal for Social Security reform is not popular.

Indeed, a new Pew Research Center survey released on the same day as the President's announcement finds that backing for new accounts has dipped to 46%, from 58% in December, an ominous sign for the traveling Salesman-in-Chief.

Bush Administration Treasury Secretary John Snow says that the Administration is willing to consider private retirement accounts that would be funded by an increase in Social Security taxes or as a new separately named tax.

Mr. Snow said the administration wanted to encourage the development of as many ideas as possible and that it was open to looking at personal accounts that would supplement Social Security rather than, as in the plan President Bush has proposed, replace a portion of the traditional government-paid benefit.

The Bush Administration is still headed toward a big marketing push to sell their Social Security private accounts proposal.

Treasury Secretary John Snow said he, Bush and other administration officials will spend the next two months barnstorming the country to try to build support for Bush's plan to allow younger workers to divert some payroll taxes into stocks and bonds.

Congressmen and Senators are distancing themselves from the Bush Administration proposal.

"I don't want to take something to the Senate floor where I've got every one of the members across the aisle saying there's a problem," Senate Majority Leader Bill Frist, R-Tenn., said Tuesday. "In terms of whether it will be a week, a month, six months or a year as to when we bring something to the floor, it's just too early (to tell)."

Some Republican politicians believe that it is a mistake to lead with a proposal built around private accounts using existing Social Security tax revenue. Such a proposal puts Democrats in the position of being able to demagogue by claiming that Republican financial interests are conniving to rip off Social Security for the benefit of rich people. So Senator Charles Grassley wants to shift the focus of the debate toward Social Security solvency.

Like other GOP leaders, Sen. Charles Grassley said he personally supports Bush's plan to divert payroll taxes into personal accounts. But Grassley, who chairs the Senate Finance Committee that would consider Social Security legislation, added that the controversy surrounding it is giving Democrats an excuse to ignore the program's serious financial problems.

"Maybe we ought to focus on the solvency and bring people to the table just over what do you do for the solvency for the next 75 years," Grassley, R-Iowa, said Wednesday.

Grassley said "personal accounts don't have a lot to do with solvency," a distinction that Bush glosses over but that his advisers concede.

"It really has given the Democrats an opportunity to focus on the personal accounts and avoid the responsibility that we all have about the solvency of it," Grassley said in an interview with Iowa reporters.

One quibble with Grassley's argument: To the extent that personal accounts are used to replace current uses of Social Security tax revenue the personal accounts will raise labor market participation rates and economic growth. Therefore they could contribute to lessening of the Social Security funding crisis. See below for more on labor market participation rates as a key but rarely mentioned element on the old age retirement funding debate.

But what date that Social Security Trust Fund theoretically runs out of money is not the first moment of crisis. The crisis will be begin as the baby boomers start to retire. In order for Social Security to be able to pay future retirees it must take back money it loaned to the US Treasury and getting that money back is going to be hard to do. The US Treasury will need to borrow enormous amounts of money on the open market to raise the funds. Plus, the Treasury is already running a large deficit which is partially hidden by the amount it borrows from Social Security. When the Trust Fund starts spending as much as it takes in (en route toward spending much more than it takes in) Treasury will have to start borrowing much larger sums on the market for its own needs. That increase in Treasury borrowing will come even before it starts to borrow even greater sums to pay back the Trust Fund. Massive borrowing on top of the existing federal debt could drive up US interest rates and choke the economy. Bush's private accounts proposal falls far short of addressing the borrowing problem.

Plus, Social Security is not even half the old age retirement benefits cost problem. Medicare is in even worse financial shape and Bush helped make Medicare's financial condition worse by supporting a huge expansion of Medicare liabilities with his support for the addition of an expensive drug benefit to Medicare.

My take on financial changes of the sort that Bush is proposing is that they fail to address the deeper root problem: The ratio of workers to retirees is going to become too low.

In 1950, there were 16 workers paying taxes into the system for every retiree who was taking benefits out of it. Today, there are a little more than three. By the time the baby boomers retire, there will be just two workers who will have to pay all the taxes to support every one retiree.

Fewer workers for more retirees mean each worker bears an increasing financial burden to pay the benefits that Social Security has promised. The original Social Security tax was just 2 percent on the first $3,000 that a worker earned, a maximum tax of $60 per year. By 1960, payroll taxes had risen to 6 percent. Today's workers pay a payroll tax of 12.4 percent.

It is going to get much worse. In order to continuing funding retiree benefits, the payroll tax will have to be raised to more than 18 percent. That's nearly a 50 percent increase.

Shifting money into new accounts and investing more money in the stock market will not make that dependency ratio problem go away. The stock market can not generate enough wealth to pay for the coming increase in the number of retirees. If the dependency ratio reaches 2 to 1 then the taxes needed to pay for Social Security and Medicare will shift the American economy toward the European model of lower labor market participation rates, slower growth, lower per capita GDP, and lower living standards. Our financial problems will grow worse as workers work fewer hours and therefore earn less and pay less in taxes. Therefore a big hike in taxes can not solve the problem either. What we need is for people to work longer and to be physically able to work longer. Already disability is coming a decade later for those born in the early 20th century as compared to those born in the early 19th century. The Bush Administration is making a big mistake by causing biomedical research funding to fall behind the rate of inflation. We need to accelerate research in biomedical sciences to produce more treatments that slow and delay aging and disability. Then people could work longer and the worker dependency ratio could be higher and less burdensome. Even with today's average level of health of people in their 60s the retirement age could be raised with the addition of early retirement for the small fraction of the population who have aged more rapidly and become unable to work.

Share |      By Randall Parker at 2005 March 03 12:22 PM  Economics Demographic

Jody said at March 3, 2005 8:43 PM:

"Shifting money into new accounts and investing more money in the stock market will not make that dependency ratio problem go away."

I beg to differ.

Long term, shifting social security to private account funding will solve the dependency ratio as workers fund their own social security making an implicit 1:1 ratio in terms of persons but an approximately 3:1 ratio in terms of work time versus retirement time (45 years working, 15 years in retirement).

Short term, however, private accounts do nothing to solve the commitments we have coming down the pipe in the next couple decades. This is why any good social security reform package should combine private accounts with some other reforms to also address the impending shortfalls.

Of course living longer (or forever sans accidents) can work too. However, we can do private accounts now (with some stuff to be named later) and the research to end aging is still a ways off at best (decade or two). While anti-aging research is desrving of funding, I don't think social security/medicare reform works as a good justification.

Randall Parker said at March 3, 2005 9:34 PM:


Yes, private accounts won't solve the commitments of the next two decades. Plus, they won't solve the problems of the decade after the next two decades. They probably won't solve the problems of the 4th decade into the future either.

You assume they will eventually fix the dependency ratio problem because they will make each person (some day) get out no more than they put in and earned from investment growth. But that is not what Bush is proposing. He is not proposing that some future cohort will get out no more than they put in or earned. Rather, he is saying that each person would get out at least as much as they get out under current government obligations and possibly more if their accounts out perform Treasury bonds.

Again, the increase in performance from private accounts can't solve the problem. At the same time, the Bush plan does not decrease government liabilities. What it does is it turns some of the existing liabilities into Treasury bond debts.

crush41 said at March 3, 2005 9:41 PM:

Again, the increase in performance from private accounts can't solve the problem.

But it solves my problem Randall. And once that is done, I'll be (even more) willing to support cuts in benefits by an increasingly drastic amount.

Randall Parker said at March 3, 2005 9:55 PM:


First of all, the proposed privatization is only very partial. Second, you are not being left off the hook of paying for the retirement of generations that are older than you.

So how do you think Bush's plan solves a problem for you?

PacRim Jim said at March 3, 2005 10:14 PM:

Slow-witted geezers are easily spooked by Democrats and will never support change, even though it would ultimately benefit them.
The battle will be convincing the younger, but they think they're immortal and can't imagine they will need social security.
Quite a dilemma for the President.

crush41 said at March 3, 2005 10:50 PM:

If I can divert 4% out of the 12% I pay into private accounts and I truly get that money when I retire, I'm confident that 4% alone will easily trump the payout my friend of the same status (opting out of the private accounts) will receive when we retire together. If the payroll percentage is raised, I'll remain somewhat placated by knowing that a part of it is an actual investment that will pay off as opposed to something that's unlikely to keep even with inflation. Because I am no longer "relying" on social securtiy benefits but instead on the market, I'll vociferously support all benefit cuts to social security, and if others my age see their private accounts growing by 8% a year, they're going to be likely to feel the same way.

I'm still not sure why the funds would have to be so conservative fifty years prior to retirement as the Bush plan currently has it laid out. Assuming a 12% return on investment, if I pay $3,500 this year into the account I'll have over a million when I retire (from that year alone, not mentioning all the other subsequent years I'd be adding to it).

You point out that in a vacuum private accounts won't let me off the hook, but the wealth creation it will indirectly cause will ease the burden a bit and spur economic growth.

I admit I'm ebullient about the market, especially stocks. I started investing just over a year ago, with decisions based on excel regressions I built, and the results have me hooked. And even with another bubble burst, utilizing stop-loss it's truly a win-win situation. In addition, it's giving capital to entities that can do something productive with it, unlike the government siphon and shuffle from which my generation is likely never to get a payback from. This is an uneducated guess, but I imagine a significant amount of support for private accounts coming from younger people is borne out of a desire to cut social security benefits/taxes since so few believe they'll ever see what they put in.

gcochran said at March 3, 2005 11:56 PM:

"Assuming a 12% return on investment" - you're nuts. Certainly the market thinks your're nuts, else it would price S%P futures a lot higher.
For the stock market as a whole, you'll be lucky to see real returns of three and a half percent over the next twenty years - mainly because valuations right now are at all-time highs. Warren Buffet is having tremendous trouble finding _anything_ worth buying and I guarantee you he knows what he's talking about.

Of course, with a national savings rate under 1% and a truly cosmic current-account deficit, Argentina may be a better model of our near future.

As I have said before, people only go crazy about the stock market when it is high (i.e. expensive) and that's the worst possible time to try a privatization scheme.

Ryan said at March 4, 2005 9:01 AM:

"I'll have over a million when I retire"

The problem is that just because you can, that doesn't mean that same system would working for the other 100 million people this effects. I like the idea of private accounts, but with little sotck market investment. We should use the private accounts to switch the foreign debt to domestic debt.... yeah it's still debt, but it reduces the influence of nations like China and Saudi Arabia.

crush41 said at March 4, 2005 11:53 AM:

The problem is that just because you can, that doesn't mean that same system would working for the other 100 million people this effects.

I didn't mean to make it individually specific to me. Returning 12% is about the historical average. The concern with overvaluation is often presented in a misleading way. There are two ways that the P/E can get back in line; 1) There can be a stock market readjustment (ie sell-off), or 2) earnings can increase in the near future, pulling the P/E back in line without stock prices declining. The first does not have to occur.

Has Warren Buffet given up his majority stake in P&G? If there were a mass sell-off, that would be a company that would certainly get hit. Also, Buffet doesn't do tech stocks because he says he doesn't understand them. That is going to limit him substantially.

Bob Badour said at March 5, 2005 3:47 PM:


The historical average is 6% to 8% and not 12%.

crush41 said at March 6, 2005 11:03 AM:

Bob, from 1900 to 2000 the market grew on average 10.58% a year, and the last two decades of the twentieth century were even higher. If you pull the disasterous 30s from the mix, the average becomes 11.83% a year. Bonds are around 8%.


Randall Parker said at March 6, 2005 11:16 AM:


I am suspicious of claims of double digit sustained stock market growth. I speak as someone who spent years writing a software package that was used for pension fund reporting and I saw a lot of numbers on returns for indexed funds and for more aggressively managed funds.

Did total market cap of publically held companies grow by that amount? I would find that hard to believe because it would require the value of the total capital stock of America to grow in value by 11% or 12% per year?

Did some index that periodically had stocks put in and taken out grow that much? Could such an index be invested in using a fund without significant transition costs from losses when stocks are taken out and added?

How much of the total market cap comes in as new issue sales? I ask that because you can not invest (unless you are a venture capitalist) in those companies before they go public. So their market caps at time of entry into the market have to be subtracted from the increase of total market cap of the entire market each year.

Are there any passive index funds that, net of fees, have returns over the last 20 years that at least match whatever rate of return you think the market did in the last 20 years?

Bob Badour said at March 6, 2005 3:15 PM:


I don't give much credence to any site or organization with 'bull' in its name. However, I notice at the page you cited, 6 of the 10 decades had returns very significantly below the returns you expect to get. (And only 2 decades had returns below what I suggested to expect.)

I would observe that we are still near the start of a secular bear market, which would make the current market much more like the market at the start of the 1960's than any other time in the period shown. I view the figures regarding the 1920's with great skepticism. The crash in 1929 sent the equivalent of the DOW back to its 1904 level, and it did not recover its 1929 high again until 1954. Although, I suppose much of those losses may have occurred between 1930 and 1933.

I see too where you got the risible idea the crash was caused primarily by corruption, which simply impeaches the credibility of your 'source' to me.

I also find your suggestion to ignore the secular bear market beginning in 1929 quite astounding. Especially considering where we are in the current bear.

The simple fact remains: There are not many bargain stocks out there--yet. There will be plenty of bargains for plenty of years before we see the next secular bull market.

crush41 said at March 6, 2005 10:01 PM:


I only pulled that site because I wanted to give you some numbers to look at and it was the first that popped up on Google. The calculation I had from a class I took over the summer actually varied a bit from that site, but the average was nearly the same. Of course some decades (and years, and days) are going to be sporadic, but if you are considering very long-term investments (read private accounts) the odds are heavily in your favor.

Why is the idea that corruption lead to the crash so ridiculous? Maybe a better word would be the use of fuzzy numbers, but the fact that every company was valued in a different way in 1929 allowed for enormous amounts of misleading. Of course, investors didn't have any historical check to let them know what was coming, so ignorance played a big part in it as well. The reason I excluded it in one calculation was because it's unlikely that something so awful will occur again--accounting standards have come a long way from N/A to CAP to APB (manifestations of the the American institute of cpas) to the FASB today. Sarbanes Oxley also helps protect investment because it keeps such a close eye on insider trading (among other things).


I was using the DJIA, the WSJ index that gets all the publicity. Yes, stocks are pulled out and inserted in on a relatively regular basis--in fact, I believe the only company that has been there since the beginning is GE. There would be some transition costs ($10 or so per account everytime they switched a company) but that would be pretty innocuous, especially when you consider that the DJIA doesn't account for dividends.

I doubt any of that growth is from new issues, because IPOs are not ever added to the DJIA, at least not that I'm aware of.

I'm not knowledgable at all about any funds because I don't use them nor do I allow my friends to. The tools and numbers are available to anyone willing to take a little time--I'm not going to pay someone else to do it for me. Oops, that didn't bode well for my humility or my support of private accounts!

I can't answer the question about passive funds, but I'm assuming the fees for private accounts would be near zero because of the huge economies of scale that would be realized. The S&P index, which is a market cap index as opposed to the Djia which is price-weighted, has grown about 1000% over the last two decades (a bit over 10% a year). Yahoo finance is the best freebie site to look at stock/index history. My guess is there are probably a few real estate-based funds that have exceeded the growth I referenced over the last two decades, as well as some tech-based funds and various small cap stuff.

Bob Badour said at March 7, 2005 6:50 AM:


The last two decades? Um, you mean during the longest and strongest secular bull market ever? And it grew at just over 10%. Isn't that at all telling to you?

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