George W. Flunks Math
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Einstein makes an unexpected appearance in George W. Bush's Social Security proposal: "Because of the impact of compound interest, which Albert Einstein called the most powerful force in the universe, diversified personal retirement accounts can be expected to earn nearly 6 percent after inflation—almost three times what Social Security now provides."
Einstein was wrong, of course. The most powerful force in the universe is stupidity. Then comes political spin. Compound interest may be third.
Class, who would like to point out the error in George's statement? That's right: Compounding affects the amount of return but not the rate. Bush can compound 2 percent as often as he likes, but when he stops, it will still be 2 percent.
Increasing the rate of return from about 2 percent to about 6 percent is the essence of Bush's plan to "save" Social Security. He would do this by allowing people to invest privately some fraction of what they now pay into the Social Security Trust Fund. Six or 7 percent is the historic long-term return on stocks. This is not, as Bush seems to think, guaranteed by the magic of compounding. But suppose it happens—not just on average, but for every individual participant. The numbers still don't add up.
First, the comparison between 2 percent and 6 percent is phony. If you think of Social Security taxes as an investment and benefits as the return, it may work out to 2 percent. But that's because current workers are paying for current retirees, not because of where what's left over is invested. As a matter of fact, the Social Security Trust Fund, in the year ending March 31, earned $56 billion of interest on assets of about $850 billion, which is more than 6 percent. Bush presumes that all the money you put into his "diversified personal retirement accounts" gets to compound away just for you. But he doesn't say how he'll replace the money you're now paying to cover current retirees.
Second, Bush promises to put the current annual Social Security surplus in a " 'lock box' ... to be preserved solely for Social Security—unlike the current administration, which has spent $295 billion of the Social Security surplus on other programs." It's hard to know what this means. The surplus currently is invested in government bonds. One of Bush's six so-called "principles" is that "Government must not invest Social Security funds in the stock market." So would he put it in real estate? Lotto tickets? Does he imagine literally stuffing $2 trillion cash in a safe somewhere? With the government running an overall surplus, it's no longer even metaphorically true that the Social Security surplus is being spent on other current programs. It's being used to finance past deficits—mostly those of President Clinton's two Republican predecessors.
Michael Kinsley is a columnist for the Washington Post and the founding editor of Slate.