Cutting Social Security Benefits Is An Alternative To Reform
April 2, 1999
A 140-page report that concludes retirees would be better off with a 20 percent cut in Social Security benefits than with personal retirement accounts makes some curious assumptions, say Heritage Foundation analysts.
Since 1900, earnings from stocks have averaged 7 percent per year after inflation, and the Social Security Administration projects that 7 percent average will continue. But the report's author, economist John Mueller of Lehrman Bell Mueller Cannon, Inc., says they are wrong:
- Mueller insists long-term earnings from stocks are determined by the economy's overall growth rate, and due to slow growth, stocks will earn only 4.7 percent after inflation in the future.
- In addition, he claims that investing in stocks is almost five times more risky than Social Security, so he reduces his already low projected earnings from stocks by another 2.9 percentage points, while reducing the return from Social Security by only 0.6 percentage points.
- Finally, he uses a contrived transition plan that would initially raise Social Security taxes by 20 percent to fund the personal retirement accounts, and to pay for personal retirement accounts and all benefits promised under the current system -- with no use of budget surpluses.
Although stocks are volatile over the short term, Jeremy Siegel of the University of Pennsylvania's Wharton School of Business finds that over a 20-year period, stocks are no more risky than U.S. Treasury bonds. Moreover, a study by Ibbotson Associates finds that stocks have gone up in value in each and every of the 54 possible 20-year periods between 1926 and 1998 that it examined.
Mueller's estimates show that a 20 percent cut in benefits would give workers a rate of return of less than 1.0 percent in some scenarios.
Source: Gareth G. Davis and David C. John, "The Mueller Social Security Report Is Flawed," Executive Memorandum No. 583, March 26, 1999, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.
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