Friday, February 18, 2005

Schumer's Fuzzy Math Calculator

Will he do tax returns too?

Charles Schumer, senior Senator from New York, is now in the financial services business, doling out advice from his website on the negative rate of return of the Bush personal savings accounts for Social Security.

Negative rate of return? How can that be, when the existing Social Security program
returns about 1% on the money you pay in, and for certain minorities with lower life expectancies results in a negative rate of return over the life of the cash flows. You could put your money into U.S. Treasury bonds and get 4-5% guaranteed, right?

Well, check out Chuck's new Social Security to Social Insecurity
calculator on his website. Just like Fidelity, Chuck is providing the tools for you to make sound financial decisions.

According to Chuck, if you are 25 years old, with an average salary of $50,000, your promised annual Social Security benefit would be $26,584, but your Bush plan benefit would be $18,198, leaving an annual cut from Bush's plan of $8,386, or a 32% reduction!

Wow! That's a lot! But wait, what are these assumptions? Chuck ignores the reality of the stock and bond markets, and how, with virtually no incremental risk, you could achieve a rate of return 3-4 times the existing program. Here's where his calculator uses fuzzy math - it avoids the rate of return comparison altogether, and factors in "price indexing," and its potential benefit reductions, to provide the negative comparison between the existing and proposed, partially privatized, system.

Price indexing refers to the pegging of benefits to increases in the cost-of-living, instead of the rise in wages. This policy, along with the raising of the retirement age, and the potential lifting of the cap on payroll taxes, are all being considered in various iterations as potential solutions to the Social Security program's pending insolvency. Private accounts would require borrowing to pay for the initial redirection of cash flows, but, over time, the greater rate of return should increase the pie of benefits to payout. But the long-term problem can't be solved by the modest personal account initiative alone, and will require other reforms to close the gap.

So Chuck's calculator isn't really a calculator at all. It's a slick assault on Social Security reform as a whole, and offers no solutions to those of us who aren't likely to see its "promises" kept.
Update: via PrestoPundit; Krauthammer tells it like it is. And we could use more ideas like this.