Dean Baker has an article in the Guardian online this morning. Given that the article is entitled "The truth about Social Security" and accuses Republicans of "scare tactics" on Social Security, one would expect that the article itself would be free of less-than-truthful scare tactics. Not so, it seems. I'll just point out two examples. First, Dean says that For those who have forgotten that nightmare, Bush's plan would have reduced benefits by approximately 1% a year for many workers. Workers who retire 10 years after the plan was put in place would have seen a 10% reduction in benefits compared with the currently projected levels. Workers who retire 20 years after the plan is implemented would see approximately a 20% cut in benefits, and workers who retire 40 years later would see their benefits cut by close to 40%. Well, the truth is that President Bush's plan wouldn't have reduced promised benefits by 1% a year for "many workers." It would have made those reductions only for the very highest earning workers, those who earned at or above the maximum taxable wage every year of their lives. It's very thoughtful of Dean to look out for the interests of the rich, but he also might want to point out that a) all retirees under Bush's plan would have received higher benefits than today's retirees; b) most retirees would see much smaller reductions versus promised benefits than the 1% per year he illustrates; and c) retirees in the bottom 30% of the earnings distribution wouldn't see any reductions at all. That's actually the truth about the Bush plan. Second, Dean likewise warns that these benefit reductions from the very rich would flow into the hands of, well, the very rich. The losses to retired workers could mean big benefits for the financial industry. Under some versions of the plan, the financial industry would rake in hundreds of billions of dollars in fees and commissions over the next 40 years. According to a recent World Bank analysis, the financial industry pocketed 15-20% of the money paid into the privatised social security system in Chile, which has often been held up as a model by privatisers in the US. Dean knows, as would anyone who reads the SSA and CBO analyses of reform plans, that the President's plan and almost all others would use a very different account management structure than was used in Chile. Almost all plans would use an administrative structure modeled after the Federal Thrift Savings plan, which differs greatly from that used in Chile, and in most cases administrative costs would between 15 and 25 basis points (meaning, 0.15% and 0.25% of assets under management). Admin costs of 15 basis points would reduce the final balance by around 3% while admin costs of 25 basis points would reduce it by around 5%. There are plenty of reasons people can honestly oppose personal accounts as part of Social Security – transition costs, market risk, etc. But these are simply deceptive scare tactics. Dean, you can do better than this.
Monday, August 25, 2008
Fact-checking Dean Baker
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Bush Proposal Differs Greatly From Model
President Has Compared His Social Security Idea to Federal Thrift Savings Plan
By Christopher Lee
Washington Post Staff Writer
Thursday, March 3, 2005; Page A23
The federal Thrift Savings Plan is to individual Social Security accounts what fashion runway attire is to personal wardrobe: an attractive model, but in the wider world things just don't fit quite the same way.
In his drive to restructure Social Security, President Bush has trotted out the 401(k)-like retirement perk for federal employees as a model for his idea of allowing younger workers to invest some of their Social Security tax contributions in the stock or bond markets.
"Personal retirement accounts should be familiar to federal employees because you already have something similar called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds," Bush said in his State of the Union address. "It's time to extend the same security and choice and ownership to young Americans."
But Bush's proposed accounts differ substantially from the 19-year-old TSP. Moreover, they would be much more difficult to run than the TSP and have far higher administrative costs than the president and his supporters let on, some experts say.
"It's a non-starter," said Francis X. Cavanaugh, a designer of the TSP who from 1986 to 1994 was the first executive director of the Federal Retirement Thrift Investment Board, which administers the plan. "There's no way they can do this without an enormous federal subsidy. . . . This has to do with workability, no matter how one feels about it philosophically, and it's not workable."
Congress created the TSP in 1986, providing federal employees a new opportunity to build retirement income by letting them salt away part of each paycheck in an array of investment funds on a favorable tax basis.
Participants seem to like it. As of January, more than 3.4 million of them had invested more than $151 billion in the five available funds. Choices range from relatively safe U.S. Treasury securities to more risky, but potentially more lucrative, investments such as the stocks of small companies. Returns last year ranged from just over 4 percent to 20 percent.
Last year, participants paid about 57 cents in administrative fees for every $1,000 invested, far less than the $5 to $15 per $1,000 invested typically charged by many private 401(k) plans, said Gary A. Amelio, the thrift board's executive director.
"The TSP is an incredibly valuable and attractive benefit to any federal employee or prospective employee," he said. "It offers world-class investment vehicles . . . to these employees at the lowest cost known in the investment world."
Tom Ressler, an Air Force veteran who took a job last year as an accountant with U.S. Customs and Border Protection in Indianapolis, said, "I don't think it influenced my decision to join the government, but it's certainly a benefit that I consider important for keeping me in."
Under Bush's proposal, as many as 118 million workers younger than 55 would be able to divert a share of their Social Security taxes into a few relatively safe, government-supervised investment funds. But most similarities with the TSP end there, experts say.
For most federal employees, the TSP serves as one leg of a "three-legged stool" of retirement income; the other two are the traditional Social Security benefit and a government pension. But because many businesses no longer offer defined-benefit pensions, many employees in the private sector have only a two-legged stool -- their 401(k) plan plus Social Security.
The money that workers divert to Bush's personal accounts, plus 3 percent interest, would come out of their guaranteed Social Security benefit. So, in effect, the president would be shaving down one of the legs and hoping that a new one -- the individual account -- would grow at least enough to compensate for the loss.
"It's not really like TSP at all," said James Sauber, chairman of the Employee Thrift Advisory Council, a 15-member panel of representatives from federal labor and managerial organizations. "He's proposing to weaken one leg of the stool to fund another leg of the stool."
Another difference is government matching money. Bush's accounts would not have any. The government puts an amount equal to 1 percent of salary into the TSP accounts of workers hired in 1984 or after, even if they contribute none of their own money. It also matches employees' TSP contributions dollar for dollar up to 3 percent of salary and at 50 cents for every additional dollar, up to 5 percent of salary. (Employees hired before 1984 can participate in the TSP, but they receive no government contribution and are part of a different pension system that does not include Social Security.) Most federal employees may contribute as much as 15 percent of their salaries, or $14,000, to their TSP account every year. Bush's individual accounts could accept no more than 4 percent of a worker's wages and would be limited to $1,000 for the first year. Unlike with Bush's accounts, TSP participants can make withdrawals in the case of financial hardship or borrow from their accounts to buy a home.
The White House acknowledges that there are many differences between the TSP and the proposed accounts, and that Bush's system would be more expensive to run. Trent Duffy, a Bush spokesman, said the president mentions the TSP mainly as an example of a publicly run system that can offer substantial investment choices at relatively low risk and cost.
"The principal comparison is in that light," Duffy said. "That's sort of where it begins and ends."
As for annual administrative costs, the White House cites estimates from the Social Security Administration of about $3 for every $1,000 invested in the individual accounts. That would be more than five times the administrative cost of the TSP, but still cheaper than most private 401(k) plans. Cavanaugh, the TSP expert, called such numbers "ridiculously optimistic." (Cavanaugh has done work in the past for AARP, an advocacy group that opposes the Bush proposal. But he said he is not being paid by any side in the individual-account debate.) Experts say the TSP is inexpensive because the government has the advantage of economies of scale: a large workforce, toiling for one employer, supported by a relatively efficient computerized payroll network. Every federal payday, the government's 129 payroll centers deduct employees' TSP contributions from their paychecks and electronically transmit them to the National Finance Center in New Orleans, the system's record keeper.
In contrast, a national system of individual Social Security accounts would involve nearly 5.7 million employers, including more than 4 million small businesses with fewer than 10 employees and without the technological savvy of the government or large corporations. Private employers now have three months to report payroll tax payments to the Internal Revenue Service. Some of them, especially smaller businesses, do their reporting on paper, and errors are common. Also, many businesses do not identify the individual workers for whom such payments were made until April, when annual tax returns are due.
In such an environment, diverting a portion of Social Security payroll deductions into TSP-style accounts could be an expensive and logistically difficult task, experts say. A 2001 Social Security Administration study concluded that "infrequent wage reporting . . . could delay the time between when IA [individual account] contributions are withheld from pay and when they are credited to individual IAs." Such delays could be minimized, the report said, but only through higher administrative costs. Running such a system would cost the government between $700 million and $3 billion annually, the report's authors wrote, adding that there would be unspecified costs to individuals and employers that they did not study.
Duffy said employers would bear no additional administrative costs. "The employer wouldn't even know whether an employee had a personal account or not," he said. "The SSA would do all the personal account oversight."
He said the White House is relying on Social Security Administration actuarial estimates of administrative costs. In a Feb. 10 memo to Robert Pozen, a financial executive who served on Bush's Social Security Commission, Stephen C. Goss, the SSA's chief actuary, wrote that each account holder would pay a "modest" annual charge equivalent to 0.3 percent of assets. "This might require some federal subsidy in early years . . . when account balances are low and start-up costs are incurred," he wrote.
Cavanaugh said costs probably would be much higher. He pointed to a 1998 Labor Department study that found that average 401(k) plan administrative expenses were nearly $300 per worker for plans with 100 employees, and even higher for smaller businesses. A national system of individual accounts would face similar cost challenges, he said, ranging as high as $30 billion to $45 billion a year. (And that does not include the trillions of dollars in transition costs associated with continuing to pay Social Security benefits to current retirees as some tax revenue is diverted to the new accounts.) If individual participants were to pay administrative costs, even on the order of $100 per worker each year, those expenses alone would eat up so much of the personal account contributions that they would be an inferior investment to traditional Social Security for millions of workers, Cavanaugh said.
"Once you tell them that in advance, they are not going to sign up," he said.
In one sense the article is correct: the Bush accounts would be funded within Social Security while the TSP is built on top of Social Security. The 'carve out' issue is what most Democrats objected to and said the comparison was incorrect.
Regarding the administrative aspects, most personal account plans were explicitly modeled after the TSP (eg., instead of money going to private investment firms it would be collected, invested and administered by a single government agency). I don't take Cavanaugh's arguments very seriously and have not found them to be very well backed up. Personal account admin costs would be somewhat higher than the TSP's, although still far lower than the typical mutual fund, but this is in part because TSP subsidizes its admin costs using foregone matching contributions of federal workers who leave prior to the vesting period.
In short, the comparison of the Bush plan's admin functions to those of Chile, which were very different, remains incorrect.
page 15 of this report:
https://www.policyarchive.org/bitstream/handle/10207/2332/RL32756_20050203.pdf?sequence=1
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