Tuesday, April 12, 2005

Democrats have been using a web-based "calculator" to generate individualized answers to the question, "How much will you lose under Bush privatization plan?" For young, low-wage workers it projects cuts of up to 50% in benefits. And a $1-million TV advertising campaign is amplifying the claim, saying, "Look below the surface (of Bush's plan) and you'll find benefit checks cut almost in half."

In fact, the calculator is rigged. We find it is based on a number of false assumptions and deceptive comparisons. For one thing, it assumes that stocks will yield average returns of only 3 percent per year above inflation. The historical average is close to 7 percent.

The calculator's authors claim that they use the same assumption used by the Congressional Budget Office. Actually, CBO projects a 6.8 percent gain.
. . . .

Independent economists consulted by the bipartisan Social Security Advisory Board in 2001 said stocks might not do quite so well in the future, but their range of estimates was still between 5.5 percent and 6.5 percent -- or roughly double the figure used by the Democrats' rigged calculator. Peter A. Diamond, Professor of Economics at the Massachusetts Institute of Technology, told FactCheck.org, "values around 6.0% or 6.5% seem to me appropriate for projection purposes." John B. Shoven, Professor of Economics at Stanford University, wrote, "My own estimate for the long-run real return to equities looking forward is 6 to 6.5 percent." And the lowest estimate came from John Y. Campbell, Professor of Economics at Harvard University. He wrote that "A rough guess for the long term . . . might be a geometric average equity return of 5 percent to 5.5 percent." Compounded yearly over a working lifetime, even a 5 percent return would produce vastly higher benefits than a 3 percent return.

What CBO Says

To justify their lowball 3 percent figure, the calculator's authors state that it is "the same assumption used by the CBO for its Social Security analysis." That's not entirely true.

It's a fact that the Congressional Budget Office did publish a study of a proposed system of individual accounts in which it used a "risk-adjusted" figure of 3 percent for one part of its analysis. But in another part of the same study the CBO assumed that stocks would return an average of 6.8 percent. A series of 500 different computer simulations of possible future outcomes showed a very low likelihood that actual future returns would be as low as 3 percent, and a decent probability that returns would be even better than 7 percent.

The "risk-adjusted" figure is an arcane concept that we won't attempt to dissect here, except to say that it is essentially equal to the expected return on risk-free, interest-bearing Treasury securities. And by using that figure in one set of calculations, CBO was not predicting stock gains of a measly 3 percent over inflation. That would be a massive turn for the worst in the economy.

Just to be sure about that, we checked with the CBO's director, Douglas Holtz-Eakin:

FactCheck.org: Does CBO's use of a 3 percent "risk-adjusted" figure constitute a prediction by CBO that equities (stocks) will return only 3 percent in the future?

Holtz-Eakin: That's the way its been portrayed. That's wrong. We assume that equities will return 6.8 percent in the future.

. . . .
Both the calculator and the ad also employ other misleading assumptions. Both assume that Bush's plan involves pegging the rise in future benefits to prices, rather than to wages as under current law. Because prices rise more slowly than wages, that would indeed produce future benefit levels that are lower than currently promised, essentially freezing benefits at the buying power they have today. The current system of "wage indexing" is expected to push the purchasing power of future benefit levels to nearly double what they are today over the next 75 years.

However, whether freezing benefit levels at their current buying power would thus constitute a "cut" is debatable, to say the least. In fact, Bush hasn't actually proposed "price indexing" or any other specific plan to restore solvency to the system. He has ruled out tax increases, implying he'd lean most heavily if not entirely on holding down benefit growth.

Compared to What?

Both the ad and the calculator use benefits promised under current law as their basis for comparison, but they fail to mention that current tax rates can't support those benefit levels beyond 2041. According to the latest projection of the Social Security trustees, benefits would then have to be cut 26 percent at that time, and that reduction would grow every year thereafter. Compared to the actual level of benefits that can be supported by the current system, Bush's supposed "cuts" would be much smaller.

Put another way, maintaining benefit growth at the level assumed by the calculator and the ad would require a tax increase, something not mentioned.

Much more at factcheck.org. Essentially the Democrats are engaged in outright fraud. This is what is wrong with politics in America, no one can just make their point on the merits they have to rely on outrageous claims and, as in this case, pure deception and fraud to try to support their positions. If your position really has merit, why do you need to bolster it via such deception?

Taxpayer groups need to start suing.
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Location: Chicago, Illinois, United States

I am an attorney in Chicago. Politically speaking, I am an indepedent that tends to lean conservative on fiscal issues and progressive on social issues. I try to remain as unbiased and open-minded as possible. Please email or post any comments, and especially criticisms. If something I say is wrong, or you disagree - let me know about it!

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