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From Fact Check; A Rigged Calculator

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Feb 14, 2005
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A Rigged "Calculator"
Democrats harness false assumptions to generate projections that individual Social Security accounts would be losers.

April 12, 2005
Modified:April 12, 2005

Democrats have been using a web-based "calculator" to generate individualized answers to the question, "How much will you lose under Bush privatization plan?" For young, low-wage workers it projects cuts of up to 50% in benefits. And a $1-million TV advertising campaign is amplifying the claim, saying, "Look below the surface (of Bush's plan) and you'll find benefit checks cut almost in half."

In fact, the calculator is rigged. We find it is based on a number of false assumptions and deceptive comparisons. For one thing, it assumes that stocks will yield average returns of only 3 percent per year above inflation. The historical average is close to 7 percent.

The calculator's authors claim that they use the same assumption used by the Congressional Budget Office. Actually, CBO projects a 6.8 percent gain.


The "Social Insecurity" calculator first appeared on the Senate website of Democratic leader Harry Reid of Nevada.

By our count, various versions of it are appearing currently on the websites of 16 Democratic senators and the website of Americans United to Save Social Security, which is a coalition that includes the AFL-CIO and Moveon.org. But it is an artful bit of automated misinformation.

To their credit, the authors of the calculator state their basic assumptions clearly for anyone wishing to read and analyze the fine print, which is more than we can say for a number of other web-based calculators we've seen. So, read the fine print we did.

Lowballing Stock Gains

One thing we found is that the calculator systematically underestimates the likely returns of investments. It says "The calculator assumes that your investments get a rate of return of 3 percent above inflation ," a figure most financial advisers would find absurdly low. As we've pointed out before , the stock market has averaged 6.8 percent above inflation for the past century .

Independent economists consulted by the bipartisan Social Security Advisory Board in 2001 said stocks might not do quite so well in the future, but their range of estimates was still between 5.5 percent and 6.5 percent -- or roughly double the figure used by the Democrats' rigged calculator. Peter A. Diamond, Professor of Economics at the Massachusetts Institute of Technology, told FactCheck.org, "values around 6.0% or 6.5% seem to me appropriate for projection purposes." John B. Shoven, Professor of Economics at Stanford University, wrote, "My own estimate for the long-run real return to equities looking forward is 6 to 6.5 percent." And the lowest estimate came from John Y. Campbell, Professor of Economics at Harvard University. He wrote that "A rough guess for the long term . . . might be a geometric average equity return of 5 percent to 5.5 percent." Compounded yearly over a working lifetime, even a 5 percent return would produce vastly higher benefits than a 3 percent return.

What CBO Says

To justify their lowball 3 percent figure, the calculator's authors state that it is "the same assumption used by the CBO for its Social Security analysis." That's not entirely true.

It's a fact that the Congressional Budget Office did publish a study of a proposed system of individual accounts in which it used a "risk-adjusted" figure of 3 percent for one part of its analysis. But in another part of the same study the CBO assumed that stocks would return an average of 6.8 percent. A series of 500 different computer simulations of possible future outcomes showed a very low likelihood that actual future returns would be as low as 3 percent, and a decent probability that returns would be even better than 7 percent.

The "risk-adjusted" figure is an arcane concept that we won't attempt to dissect here, except to say that it is essentially equal to the expected return on risk-free, interest-bearing Treasury securities. And by using that figure in one set of calculations, CBO was not predicting stock gains of a measly 3 percent over inflation. That would be a massive turn for the worst in the economy.

Just to be sure about that, we checked with the CBO's director, Douglas Holtz-Eakin:

FactCheck.org: Does CBO's use of a 3 percent "risk-adjusted" figure constitute a prediction by CBO that equities (stocks) will return only 3 percent in the future?

Holtz-Eakin: That's the way its been portrayed. That's wrong. We assume that equities will return 6.8 percent in the future.

ProtectYourCheck.org Ad "Life Line"

Announcer : It's just the tip of the iceberg that threatens your retirement. The plan that George Bush and his backers in Congress have to privatize Social Security. Look below the surface and you'll find benefit checks cut almost in half. Five trillion dollars in new debt. The retirement you're earning. . . taken away. For 70 years Social Security has been America's lifeline. Don't let their privatization plan cut it. Call Congress. The Social Security you earned isn't theirs to take.

"Cut almost in half?"

The same kind of skewed calculations are also being used in a current TV ad being run by a new organization, "ProtectYourCheck.org ," headed by Harold Ickes, the former Clinton deputy who ran the massive Media Fund campaign against Bush during the 2004 campaign. The latest ad says of Bush's Social Security plan, "Look below the surface and you'll find benefit checks cut almost in half." To back up that claim, the Ickes organization cites the CBO analysis using the "risk-adjusted" figure, ignoring other CBO projections using the more realistic 6.8 percent assumption.

What Cut?

Both the calculator and the ad also employ other misleading assumptions. Both assume that Bush's plan involves pegging the rise in future benefits to prices, rather than to wages as under current law. Because prices rise more slowly than wages, that would indeed produce future benefit levels that are lower than currently promised, essentially freezing benefits at the buying power they have today. The current system of "wage indexing" is expected to push the purchasing power of future benefit levels to nearly double what they are today over the next 75 years.

However, whether freezing benefit levels at their current buying power would thus constitute a "cut" is debatable, to say the least. In fact, Bush hasn't actually proposed "price indexing" or any other specific plan to restore solvency to the system. He has ruled out tax increases, implying he'd lean most heavily if not entirely on holding down benefit growth.

Compared to What?

Both the ad and the calculator use benefits promised under current law as their basis for comparison, but they fail to mention that current tax rates can't support those benefit levels beyond 2041. According to the latest projection of the Social Security trustees, benefits would then have to be cut 26 percent at that time, and that reduction would grow every year thereafter. Compared to the actual level of benefits that can be supported by the current system, Bush's supposed "cuts" would be much smaller.

Put another way, maintaining benefit growth at the level assumed by the calculator and the ad would require a tax increase, something not mentioned.

And For Whom?

The ad also fails to mention whose benefits would be "cut almost in half." Actually, no cuts are proposed for anyone currently getting benefits, something the ad fails to make clear. The calculator is better on this score. It simply won't work for anyone who types in a birthday before 1950. The ad, however, invites current retirees to believe that their benefits would be cut, which is false.

Even accepting the dubious assumptions of the calculator, getting it to produce a "loss" as big as 50 percent requires using a birthday of 2005. In other words, the only persons whose benefits would be "cut" by "half" won't be retiring for another 65 years or so.

An Uncertain Future

We take no position on whether individual accounts are a good idea or a bad idea, and nothing here should be taken as an endorsement or as opposition. Opponents are correct to point out that the future returns of investments are uncertain. In our Feb. 3 article we faulted President Bush for saying accounts "will" grow fast enough to provide a better return than the present system. Nobody can guarantee that. It is within the realm of possibility that for the next 75 years stocks will actually produce a miserable 3 percent return, as the Democratic calculator assumes. But history offers no support for such a pessimistic prediction, and neither do economists consulted by the bipartisan advisory board to the Social Security system.


John Y. Campbell, Peter A. Diamond & John B. Shoven, "Estimating the Real Rateof Return on StocksOver the Long Term," Social Security Advisory Board, Aug 2001.

"The Short- and Long-Term Outlook for Stocks," Knowledge@Wharton website, The Wharton School, University of Pennsylvania: 2 June 2004. (Free subscription required.)

Congressional Budget Office, "Long-Term Analysis of Plan 2 of the President's Commission to Strengthen Social Security," 21 July 2004 (Updated 30 Sept 2004).

"The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds," 23 March 2005.

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