Conservatives are still reeling from Bush's endorsement of "progressive price indexing," a massive blow to the middle class which doesn't really kick in until after the supposed crisis. While many oppose the idea, the majority of Privateers have already drunk the Kool Aid.

MYTH: Pozen's progressive price indexing achieves solvency

In a detailed memorandum written on Feb. 10, Chief Actuary Stephen C. Goss said he crunched the numbers on Mr. Pozen's plan and found it would keep Social Security "solvent," meeting all of "its benefit obligations through the long-range period 2004 through 2078." And if that is not enough to satisfy the fiercest deficit hawk, Mr. Goss added that Mr. Pozen's plan "would be expected to restore sustainable solvency for the program, that is, the program would be expected to be financially solvent for the foreseeable future." And it would do so without plunging the government and taxpayers deeper into debt, without hurting the most vulnerable lower-income Americans, without raising anyone's taxes and without touching the benefits of retirees or those who retire in the next decade or so. (Donald Lambro, "Redeeming redesign?" Washington Times, 5/5/05)

REALITY

What an incredible discovery by "reporter" Lambro, if it is true -- it would be a scoop over all the other newspapers which reported that Pozen's plan covers 70 or 72% of the 75-year deficit. (Bush's plan differs from Pozen's and covers around 59%.)

However, the Moonie Times's star correspondent simply made a gross error. He discovered the same "detailed memorandum" that everybody else uses, he just read it wrong!

In particular, he didn't make it through the description of the plan, which includes this key paragraph:

The OASDI Trust Funds will receive transfers from the General Fund of the Treasury if, at any time, the combined OASDI Trust Fund ratio (TFR, the ratio of assets in the trust funds to the projected cost of the program for the next 12 months) is expected to fall below 100 percent under the provisions of the plan during the following year. Transfers would be sufficient to maintain this 100 percent TFR. This provision would guarantee solvency and sustainable solvency for the trust funds in any circumstance. (Stephen Goss memo on Pozen plan, SSA, 2/10/05, p. 5)

In other words, if there is any deficit, then Social Security will simply get a boost from the general revenue (i.e. debt and taxes). Why, if we are to believe Lambro, this is indeed a brilliant discovery. In fact, I can offer my own plan to completely restore any funding shortfall:

POLIANNA.COM SOCIAL SECURITY SOLVENCY PLAN #512:

The OASDI Trust Funds will receive transfers from the General Fund of the Treasury if, at any time, the combined OASDI Trust Fund ratio (TFR, the ratio of assets in the trust funds to the projected cost of the program for the next 12 months) is expected to fall below 100 percent under the provisions of the plan during the following year. Transfers would be sufficient to maintain this 100 percent TFR. This provision would guarantee solvency and sustainable solvency for the trust funds in any circumstance

END OF PLAN

What an incredibly useful clause to have!

In reality, if you read the very memo Lambro cites, it claims that Pozen's proposal (leaving aside its private accounts, which make matters substantially worse) would cut benefits by $2.91 trillion and leave $0.2 trillion in the bank after 75 years. That amounts to $2.71 trillion of the Trustee's (2004) projected pessimistic shortfall of $3.7, or about 74% (see Goss, p. 7). The rest of the "full solvency" -- the other trillion -- comes from Congress and taxpayers.

As for Bush's plan -- well, unlike everybody else, he hasn't sent one to be analyzed by the Social Security actuaries, leaving it to others to piece together his jury-rigged design. Bush has promised not to cut disability insurance (at least until the disabled person retires), and that alone drops progressive price indexing's cuts to covering 59% of the system's pessimistic shortfall. Since the White House is so committed to those unlikely, pessimistic numbers -- that's their "crisis" -- we should ask them, where's the rest coming from? Either more cuts (another 15%) or more taxes.

While we're at it, we might as well clear up one troublesome misunderstanding about the president's proposal.

MYTH: Progressive price indexing is "means testing"

Progressive indexation is means testing politely labeled, and means testing, however labeled, is an attribute of welfare programs. (George Will, "Turning away from government," Town Hall, 5/8/05)

All proposed solutions we've seen so far from Democrats would further undermine popular support for Social Security by tilting today's heavily means-tested Social Security system even more severely against those who pay the most in payroll taxes. (Alan Reynolds, "Fatally 'progressive' plan," Washington Times, 5/8/05)

REALITY

To conservatives, "means testing" is a dirty word. As George Will pointed out, that's welfare (hiss!), and anti-government ideologues who wish to eliminate Social Security would like nothing more than to turn the system into a welfare program. We explored this angle two weeks ago.

But means testing is completely foreign to the Social Security debate (so far). Reynolds (an "economist"?) claims the current system is "heavily means-tested" -- a claim based on nothing but his no doubt active imagination.

Social Security is a uniquely American insurance system. The payroll tax is excessively regressive -- more regressive than a flat tax, since it only taxes the first $90,000 of income. But benefits are slightly progressive. Benefits are calculated using a replacement rate (a percentage of pre-retirement income you will receive in retirement), and the lower parts of your pre-retirement income have a higher replacement rate. (In particular: 90% of your first $7,500, then 32% of your next $38,000, and then 15% of the rest.) This is somewhat arcane, but it manages to (1) reward a lifetime of work, no matter how much you've made, (2) guarantee adequacy, since basic needs are met by the base of income, and (3) still provide an amount relating to your payments into the system.

But one thing it does not do is test for means. An example of means testing would be if the system were to calculate benefits based not on your working life, but your other sources of retirement income. For example, if you were able to save up a nest egg, your benefits would be lower than someone who ignored retirement and ended up penniless. That probably would not be such a hot idea -- conservatives would call that a "bad incentive" -- and fortunately, nobody has proposed it.

And certainly the president hasn't. Sorry, George, but progressive price indexing has nothing to do with a retiree's means. It moves around the replacement rates so that, eventually, benefits will top out at the lower end (middle and upper-middle earners will get almost the same benefits as a low-income worker) -- but the system wouldn't care what other retirement income sources one has.

This actually leads to a grievous problem when combined with the president's private-accounts proposal. Suppose a worker invests the maximum in one of these private accounts -- about a third of their payroll tax. At the same time, the government keeps a "shadow account" to mark how much this worker has withheld from the traditional system. The "shadow account" accumulates at a fixed 3% above inflation, and when the worker retires, the amount in the "shadow account" is deducted from their traditional benefits. Obviously, if the worker fails to earn at least 3% on their investment, they will get less than they would have staying in the system. (Bonds, for example, get a little over 2%, and even "life-cycle" accounts are losers for most people.)

But when you combine that "shadow account" subtraction (the "clawback") with Bush's price indexing, you have someone getting their upper-middle-sized "shadow account" clawed-back from a lower-income-sized benefit, and you achieve the preposterous result, in some cases, of them losing their entire traditional benefit!

According to calculations by the Center for Budget and Policy Priorities, an average earner ($36,000) retiring in 2055 would have put aside a third of their payroll tax but would lose two thirds of their defined benefit. Meanwhile, a higher earner ($59,000) would lose 87% of their defined benefit, and someone earning $90,000 would lose 92%!

It gets worse over time. By 2075, that $36,000-earner would lose 73%, the $59,000 would lose 97%, and the $90,000 would lose 100%. People will even begin to owe money, although there is no "proposal" on the table yet on how to collect.

More and more middle-class Americans would pay in to Social Security their entire lives, and get zero defined benefit. They would have their private accounts (amounting to one-third of payments), but they would not get any guaranteed security.

In other words, the fundamental characteristic of Social Security -- that it is insurance against retirement uncertainty, providing a guarantee of adequate support -- would be eliminated for most Americans. These private accounts would not only seem puny (based on one third of, rather the the whole, payroll structure) but they could very well be empty! That's the nature of investment risk, and that's what Social Security is supposed to counteract.

So imagine a worker who earns $59,000 (the upper half of Americans, but not exactly rolling in it) and trusts Bush's private accounts option -- but falls flat on his face due to misfortunate in the stock market. On retirement, that worker would have nothing -- not a private account, not Social Security. Nothing. A few nickels from collecting cans, perhaps.

And George Will calls that "means testing"? It is the exact opposite.

MYTH: Demagogic Dems should be swooning over progressive price indexing

Unfortunately, every overture, including this latest one, Mr. Bush has made to the Democrats on Social Security has been rebuffed. The plan to trim future benefits to higher-income Americans would no doubt be warmly embraced by the "class warfare" Democrats as fair and balanced if, say, Bill Clinton proposed it. But Democrats want to play politics, rather than fix the program... (Stephen Moore, "Social Security olive branch," Washington Times, 5/9/05)

When the president embraced the notion of benefits growing least rapidly for high-income workers, the idea received the harshest criticism from egalitarian Democrats. (Alan Reynolds, "Fatally 'progressive' plan," Washington Times, 5/8/05)

The unilateral Democrat reaction to President Bush's proposals to fix the problems with Social Security, before they become unfixable, has been to deny the inevitability of those impending problems while fanning the flames of fear and hysteria, particularly among the nation's elderly. (Chris Adamo, "Democrats' dangerous game of indifference," NewsMax, 5/8/05)

REALITY

We could list more of these quotes from the right, but why bother? We expect them to make such charges. Instead, we can find the exact same mythos on the op-ed pages of the New York Times, from a supposed liberal, a fellow at the Center for American Progress named Matt Miller:

You'd never guess from the Democratic hysteria that President Bush's plan to "progressively index" Social Security is an idea we liberals may one day want to embrace. [...]

When Democrats cry about "cuts," they mean trims from these higher levels. [...]

We know Democrats aren't making sense here because their chief argument is that "progressive indexing" (to prices, not wages) would cut retirement incomes too deeply by 2075. This may be true. But it's a little like worrying that Captain Kirk's phaser may malfunction in that year as well. [...] If, instead, you look out 20 to 30 years, the benefit trims consistent with Bush's idea are modest. [...]

Responsibly Demagogic Democrats will blast Bush for wanting to borrow fresh trillions to create dubious new private accounts. But they won't dis "progressive indexing" on the merits, even though it's a juicy gazillion-dollar pseudo-"cut." (Matt Miller, "Wanted: responsible demagoguery," New York Times, 5/11/05)

First off, I'm just going to assume Mr. Miller has no clue what he's talking about. Most commentators discussing Social Security are ignorant of fundamental details, but that seems only to increase the value of their opinions in today's marketplace of ideas.

What I see, instead, is a kind of careerist centrism -- similar to Kurt Anderson's claim that liberals who oppose Bush policies are rooting for terrorists. The self-described liberal, otherwise uninteresting and ignored, will boldly lash out against "his side" in language that would be considered viscious and personal coming from the right. His "courageous" positioning will earn him undeserved attention and credibility among other influential centrists.

Now, it is well known among graduates of the third grade that "cut" and "trim" are synonyms -- the difference being a matter of emphasis. Why does Miller join Privateers in denying that price indexing is a cut? As we explained last week, it sure as hell is a cut -- and a big one. It amounts to more of a cut than doing nothing (the so-called "crisis"). As Bob Somerby notes, the replacement of pre-retirement income for an average worker drops from 36% to 20%, and even lower (see above).

And it certainly is strange for Miller to scold us for looking at the 75-year scale. That's the length of time used by the Social Security Trustees in their dire predictions, and the entire debate this year has used the supposed 75-year shortfall. (Privateers get even more creative sometimes and use the zany "infinite horizon" projection. Trippy.) Progressive price indexing creates a structural time bomb in the system which actually gets worse if the economy does better than the Depression-level conditions projected.

But let's follow Miller and look out 20 to 30 years. At that time, without making any changes to Social Security, the system will be paying out scheduled benefits in full. Wait, I thought there was supposed to be a "crisis"?

Again, I sympathize with Miller for not being aware of these basic facts surrounding the debate over privatization -- it is an arcane area. It's hard work. What I do fault him for is making statements that not only cannot be supported, but also echo precisely the ad hominem attacks (as opposed to the numbers war) from the right. It is very difficult to see any but a cynical , self-serving motive behind that.