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Contents : cepr Briefing Paper Center for Economic and Policy Research Basic Facts on Social Security and Proposed Benefit Cuts/Privatization Dean Baker and David Rosnick1 March 2005 CENTER FOR ECONOMIC AND POLICY RESEARCH 1611 CONNECTICUT AVE. NW SUITE 400 WASHINGTON D.C. 20009 (202) 293-5380 WWW.CEPR.NET EMAIL: CEPR@CEPR.NET Dean Baker is the co-director of the Center for Economic and Policy Research. David Rosnick is a research assistant at the Center for Economic and Policy Research. 1 1) Social Security is Financially Sound According to the Social Security trustees report the standard basis for analyzing Social Security the program can pay all benefits through the year 2042 with no changes whatsoever. Even after 2042 the program would always be able to pay retirees a higher benefit (in today's dollars) than what current retirees receive. The assessment of the nonpartisan Congressional Budget Office is that Social Security is even stronger. It projects that Social Security can pay all benefits through the year 2052 with no changes whatsoever. By either measure Social Security is more financially sound today than it has been throughout most of its 69-year history. 2) President Bush's Social Security Cuts Would Be Large The proposal that President Bush is using as the basis for his plan phases in cuts over time. A worker who is 45 today can expect to see a cut in guaranteed benefits of around 15 percent. A worker who is age 35 can expect to see a cut in the guaranteed benefit of approximately 25 percent. A 15 year old who is just entering the work force can expect a benefit cut of close to 40 percent. For a 15 year old this cut would mean a loss of close to $200 000 in Social Security benefits over the course of their retirement (see appendix). Private accounts will allow workers to earn back only a small fraction of this amount. For example a 15 year-old can expect to make back approximately $9 000 from the $200 000 cut with the earnings on a private account. If this worker retires when the market is in a slump then it could make their loss even bigger. 3) Imaginary Stock Returns Don't Offset Real Benefit Cuts Proponents of private accounts have often used highly exaggerated assumptions on stock returns to argue for the benefits of private accounts. For example even at the height of the stock bubble in 2000 when the price to earnings ratio in the market exceeded 30 to 1 many proponents of private accounts assumed that stocks would generate 7.0 percent real returns annually. This assumption was absurd on its face - it implied that price to earnings ratios would rise to levels of more than 100 to 1. Unfortunately even the Social Security Administration has used these unfounded assumptions in assessing privatization plans. Given current price to earnings ratios and the Social Security trustees' profit growth projections real stock returns will average less than 5.0 percent annually. Some proponents of private accounts are still using exaggerated stock return assumptions to advance their case. 4) Social Security is Extremely Efficient Private Accounts Are Wasteful On average less than 0.6 cents of every dollar paid out in Social Security benefits goes to pay administrative costs. By comparison systems with individual accounts like the ones in England or Chile waste 15 cents of every dollar paid out in benefits on administrative fees. President Bush's Social Security commission estimated that under their system of individual accounts 5 cents of every dollar would go to pay administrative costs. In addition under Social Security workers automatically get an annuity (a life-long monthly payment) when they retire. By contrast financial firms typically take 10 to 20 percent of workers' savings to provide an annuity when they reach retirement. 5) Social Security Pays the Most to Those Who Need it Most Social Security benefits are highly progressive so that low wage workers get a much higher share of their wages in benefits than do high wage workers. A worker who earned $10 000 a year during their working lifetime can expect to see a benefit that is equal to approximately 70 percent of their average wage. A worker who earned $36 000 a year will get a benefit that is equal to approximately 40 percent of their wage while a worker who earned $50 000 on average will get a benefit that is equal to 35 percent of their wage. While poorer workers do not live as long as higher paid workers the progressive benefit structure largely offsets differences in life expectancy (as do disability and survivors benefits for those who do not live to normal retirement age). Furthermore since plans are being made for the distant future the United States could reduce the gaps in life expectancy by income and race as other countries have done.

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