Calculator Mischief

I put up a link to that Social Security calculator yesterday saying that I suspected something fishy. I then took a look at the assumptions the calculator used, and indeed there was much going on in the way of deception, with a corresponding dirth of transparency.

The assumptions where these: Future benefits would be indexed to wages with four percent personal retirement accounts (fair enough so far), but then, the accounts would have a contribution limit of 1000 dollars per year -- the cap increasing every year by 100 dollars plus an adjustment for inflation. Huh? No such thing has been proposed by the Bush administration so where did this come from? In addition the return on the account was only 3 percent -- dismally low compared to the stock market average of about 7 percent (accounting for inflation).

These assumption produce seriously flawed results. If you make 50,000 dollars annually, Bush's real plan would allow you to invest two thousand of those dollars, twice as much as what this calculator has allowed for. On top of that you would receive a much higher rate of return, probably at least 5% if you're a very conservative investor -- even higher if you're not.

They do have one point; indexing Social Security benefits to inflation will produce lower returns on your money that is still in the old Social Security system. The problem is the that they inappropriately put far to much money into that old system and give much to small of returns on the money in the new personal accounts. That means money that would actually be earning a fairly good return, is, under the Dem's assumptions, earning a negative return -- and that screws things up significantly enough to make a good deal look bad. Nevertheless, the personal accounts -- even under the democrats assumption -- have higher rates of return than the current Social Security system now has. (though they don't point that out)

If you look at the assumption there are other things that tell you something is not right. For instance, personal account are called a "loan" from Social Security to invest. Well that's nonsense. You earned that money not the government; and the money is for your retirement. Its not a loan its what economists call and opportunity cost -- that is the cost to you of choosing one use of your capitol over another. The classic economics example is a person who has two job offers. Job X offers 30,000 a year, job Y 40,000. The opportunity cost for picking job Y is 30,000 dollars. THAT'S NOT A 30,000 DOLLAR LOAN, ITS AN OPPORTUNITY COST! Calling personal accounts a loan shows you how these liberals think. If you keep your own money and invest it (at a rate higher than what Social Security promises you --even they admit that) well you've incurred a debt. Nonsense, what you've done is turn a bad investment in the government into a good investment in the private sector.

But there is one other problem -- the Dem's calculation compare the (deeply flawed) "numbers" from "Bush's plan" with today's promised benefits. The problem? How will we pay for those benefits? Raise taxes? Since personal account and cutting benefits are off the table raising taxes is all that's left. And If we do, we'll have less than three people paying for every retiree! Payroll taxes will have to be very high in order for that to work -- very high indeed.

So once again there are your choices; really high taxes or personal accounts -- take your pick.

P.S. More here by Michael Tanner about mortality rates and annuities, probably not taken into account (the fact that the calculator does not ask for your sex is a dead giveaway). Here is a calculator by Cato that takes mortality rates into account.