Not So Simple Arithmetic on Social Security

October 1, 2002

On September 24, the Winston Salem Journal published the following letter from the head of the NC Democratic party regarding Social Security reform plans incorporating personal retirement accounts. A response from Cato Social Security analyst Andrew Biggs follows:

"Simple Arithmetic"

"In Thursday's editorial about political television ads, the Winston-Salem Journal simply got its facts wrong. There is no Erskine Bowles ad about Social Security. The North Carolina Democratic Party is running the ad that documents Elizabeth Dole's support for privatizing Social Security and Erskine Bowles' stand to protect this important program."

"It also misstated Elizabeth Dole's position on changing Social Security. Although Elizabeth Dole has time and time again advocated putting workers' payroll tax into the stock market - the definition of privatization - the Journal inaccurately characterizes her program as reform. It is not reform. Her plan to privatize Social Security is devastating to current and future recipients.

"It's simple arithmetic. You cannot take money out of payroll taxes and still have money to pay full benefits. Clearly, if you take money out of Social Security, no matter if it's voluntary or involuntary, you have less money to pay Social Security benefits.

"That's just common sense. Multiple independent organizations who have looked at this closely have found the same result.

"According to the AFL-CIO, if Social Security were privatized in July 2002, the guaranteed monthly benefits for the average retiree would fall by 46 percent, or $374, from $814 to $440 per month.

"An average North Carolina retiree's guaranteed benefits would be cut 46 percent. The retiree would be left with total guaranteed benefits of $5,280, about $3,000 less annually than the poverty level for an elderly person living alone.

"North Carolina deserves better."

Barbara Allen
Chairwoman
N.C. Democratic Party

Following is a response from Andrew Biggs, Social Security analyst at the Cato Institute:

To the Editor:

"North Carolina Democratic Party chairwoman Barbara Allen said it is 'simple arithmetic' that adding personal retirement accounts to Social Security would cut benefits for current retirees. She cites supposedly 'independent' research from the AFL-CIO that under proposals from the President's bipartisan reform commission "an average North Carolina retiree's guaranteed benefits would be cut 46 percent. The retiree would be left with total guaranteed benefits of $5,280, about $3,000 less annually than the poverty level for an elderly person living alone."

"Ms. Allen's statements and the accompanying figures are, simply put, wholly and unequivocally false. Had Ms. Allen consulted a truly independent source – Social Security's non-partisan actuaries, who conducted an extensive analysis of the Commission's proposals – she would have discovered the following:

• No current retiree, nor any worker over age 55, would have his or her benefits affected by even a penny under Commission proposals.
• Workers under the age of 55 would have the option to invest part of their payroll taxes in personal retirement accounts and in all cases could expect higher retirement benefits than the current system will be capable of paying.
• Commission proposals would keep Social Security solvent permanently, averting an over 50 percent payroll tax increase to keep the current program solvent.
• Commission proposals would enhance Social Security's progressivity, increase benefits for lower-income widows and include a new anti-poverty guarantee that any individual who worked for 30 years at the minimum wage would receive a benefit equal to at least 120 percent of the poverty line. This last improvement would lift up to one million retirees out of poverty by 2018.

"Ms. Allen concludes her letter by stating 'North Carolina deserves better.' Indeed they do. Provably false statements that current retirees would see their benefits cut in half are utterly unfit for a mature debate over the solutions to Social Security's substantial financing problems. Those problems will be solved by concrete proposals, not irresponsible scare tactics aimed at America's seniors."

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