Social Security: This loan is your loan

By Tim Grieve

Published February 4, 2005 2:59PM (EST)

The Washington Post's report on George Bush's Social Security scheme Thursday didn't get the facts exactly right, but it wasn't as wrong as the White House would have you believe, either. While there are plenty of flaws in the president's proposal, the Post identified one that apparently doesn't exist; contrary to the Post's report, a worker who invests in one of Bush's private investment accounts would get to keep the entire balance of that account, minus administrative costs -- and not just the amount in the account that exceeds the government's contribution and annual interest.

Sort of. While it's true that the government wouldn't deduct the government's contribution or annual interest from the retiree's private investment account, the government would deduct that amount from the traditional Social Security benefits the retiree would otherwise receive. Think of it as a loan: The government is going to let you borrow the money to fund your private investment account, but you're going to have pay that money back, with interest, out of the proceeds you'd otherwise get from Social Security. It's like working two jobs and getting a pay raise at one but a pay cut at the other: the two cancel themselves out, and you end up with the same amount of money in your pocket either way.

Well, sort of, again. In the "fact sheet" it distributed to rebut the Post s "myths" with its version of "reality," the White House makes it all seem like a break-even deal at worst and maybe a benefit for the retiree at best. But it's not really that way.

In its fact sheet, the White House sets out three examples of choices workers might make under the Bush plan one worker might remain fully invested in the traditional Social Security program with no private account at all, another worker might divert funds into a private investment account that happens to earn 3 percent a year, and the third worker might divert funds into a private account that earns 4.6 percent a year. Under the White House s math, the first and second workers would break even at retirement. Worker No. 1 would get his regular Social Security benefit. Worker No. 2 would see his regular Social Security benefit reduced by the amount that the government put into his private investment account plus 3 percent in annual interest, but he'd have exactly that same amount in his private investment account. And lucky duck Worker No. 3 would be in high clover, or wherever it is that ducks like to be: He'd get his regular Social Security benefits, reduced by the government contribution to his private investment account plus 3 percent interest, but that would be more than offset by the amount in his private investment account because his investments happened to do well.

Notice anything missing? Right. There aren t any losers here. The White House had room for three hypothetical workers on its fact sheet, but it couldn t make room for one whose investments underperformed Social Security or God forbid! actually lost money. The White House imagines -- or, at least, it wants the public to imagine -- a world like Lake Wobegon, a place where the women are strong, the men are good looking, and all of the investors are above average.

But wait, there's more. In all the talk about "breaking even" and "doing better," the White House fails to mention that everyone might actually do worse. The president is selling his Social Security plan based on the idea that the system is now "heading for bankruptcy." But the White House acknowledges -- not in so many words, of course -- that the Bush proposal will do nothing to shore up Social Security's financial health. At a briefing just before Bush's State of the Union speech, a senior administration official told reporters that "the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government."

So if the administration is serious about keeping Social Security in the black, it's going to have to find some other way of fixing its finances. The president has already ruled out raising payroll taxes, so that pretty much leaves cutting Social Security benefits. If Social Security benefits are cut from everyone, then even folks who do well with their private investment accounts could find that they end up with less than what they'd get under the current system. Bush said Wednesday night that the proceeds retirees receive from their private investment accounts would be over and above "the check" they get from Social Security. He just didn't say how big -- or how small -- that check might actually be.

Tim Grieve

Tim Grieve is a senior writer and the author of Salon's War Room blog.

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