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Economic Reporting Review

May 22, 2000:

Social Security Plans; Interest Rate Hikes; China Trade

By Dean Baker

Social Security | Interest Rates | Trade | Patents | The Euro | Outstanding Stories


"Bush Versus Gore Means an All-Baby-Boom Race"
Katharine Q. Seelye
New York Times, May 14, 2000, Section 1 page 22

"Social Security Reform Issue Becomes Defining Issue"
Dan Balz
Washington Post, May 15, 2000, page A1

These articles examine the two major party presidential candidates' approaches to Social Security. Both articles seriously misrepresent the finances of the program, presenting a picture that is far worse than is shown by the Social Security trustees report.

The Times article asserts that "the government predicts that the trust fund will begin paying out more than it takes in by 2015." The Post article similarly claims that program's "finances will begin to deteriorate in about 15 years." According to the most recent trustees report, the program's income will exceed its scheduled benefit payments by $270 billion in 2015.

The statements in the article presumably refer to the fact that in 2015, the benefits paid by Social Security will exceed the amount collected in Social Security taxes; the surplus in that year is entirely attributable to the interest on the government bonds held by the trust fund. However, the relationship between the tax collected for the program and the benefits paid out has absolutely no meaning for the health of the program. The only reason the fund built up a surplus was to cover this anticipated shortfall, so it is not a problem for the program that it is dependent on using this surplus.

By focusing on the date 2015, these articles are legitimizing a trick that many politicians have employed to scare people about Social Security. When it is convenient, they speak as though there is no separate Social Security trust fund, but at other times, their argument that the fund could ever go broke depends on the existence of a separate trust fund.

The basic logic here is straightforward. If the Social Security trust fund has any meaning as a separate accounting entity, then the source of its revenue is irrelevant. If the fund doesn't have meaning, then it is absurd to say that the program will ever go broke. In this case, Social Security would be just another program that is projected to cost more in the future, like Medicaid or criminal justice. If there is no separate fund, there is nothing, other than the Federal government, which could ever go broke, just as the criminal justice system could never go broke.

The articles include several other comments that are wrong or misleading. For example, the Times article states that "without a major fix, the system could go broke by 2037." The Post article similarly warns of bankruptcy by that date. These comments are misleading, because even if no changes were ever made, the projections show that the program could still pay out benefits that are larger, in today's dollars, than an average retiree currently receives from Social Security. While the projections do show that there will be a shortfall after 2037, the notion that the program would ever be completely broke, and unable to pay a significant benefit, has absolutely no foundation. It is unfortunate that these articles present the situation in this manner, because polls consistently show that many people wrongly believe that the fund will not be able to pay them any benefits.

The Post article includes several other significant misrepresentations. It implies that the main problem of the program is the demographic bulge associated with the baby boomers. In fact, the baby boomers' retirement will be largely covered by the surplus the fund is currently accumulating. The real long-term problem facing the program is simply that people are projected to live longer. Longer lives mean longer retirements, which cost more money.

"Bush Proposal Ventures Into Financial Unknown"
Glenn Kessler
Washington Post, May 16, 2000, page A6

This informative article analyzes the Social Security proposal put forward by presidential candidate George W. Bush. At one point, it notes that Bush's aides defended their projections on stock returns by saying that the Social Security trustees economic predictions were too gloomy. It is worth noting that if his aides believe the trustees economic predictions are overly pessimistic, then they also must believe that the program is even healthier than the latest trustees report indicates.

"Bush Maps His Changes For Social Security"
Dan Balz
Washington Post, May 16, 2000, page A1

"Challenges to Bedrock of Retirement"
Richard W. Stevenson
New York Times, May 16, 2000, page A18

"Gore Denounces Bush Social Security Plan as Too Risky"
James Dao and Alison Mitchell
New York Times, May 17, 2000, page A18

"Social Security Debate Framed in Generalities"
Jonathan Fuerbringer
New York Times, May 17, 2000, page A18

These articles discuss George W. Bush's proposal to replace a portion of Social Security with individual accounts. They all imply that it will be possible to get significantly higher returns in the future in the stock market than in government bonds. There have been several papers by economists which show that, given current stock valuations and the growth projections from the Social Security trustees, it will not be possible to get significantly higher returns on stock than on government bonds. (See, e.g., "Saving Social Security With Stock: The Promises Don't Add Up," by Dean Baker, Century Foundation, 1997; May 15,1999 letter to Martin Feldstein, by Dean Baker, ; and "What Stock Market Returns to Expect for the Future?" by Peter Diamond . ) No economist has been able to demonstrate how the stock market will be able to provide its historic rates of return in the future, given current stock valuations and the low projected growth rate for profits in the Social Security trustees projections. In the absence of any evidence to support this contention, it is irresponsible for these articles to suggest that high future stock returns are a possibility.

"Gore Has Not Bought Stocks for Decades"
Katharine Q. Seelye
New York Times, May 17, 2000, page A18

This article discusses the extent to which Vice President Al Gore has held his savings in stock, implying that this bears some relevance to his views about putting Social Security money in the stock market. There is no obvious connection between the two. Gore has earned Social Security benefits, and presumably also a sizable government pension as well. This would be income that he could rely upon in retirement. If, in addition to this income, he chose to place a portion of his money in the stock market, it would not imply that he considers it appropriate to replace his core retirement income with stock market investments. This article misrepresents the nature of the debate over Social Security by implying that individuals' decisions on how to hold their savings, when they can rely on a core Social Security benefit, imply the best way to invest the money that provides the basis for this core benefit.

"Gore Touts Social Security Plan"
Glenn Kessler
Washington Post, May 18, 2000, page A6

This article analyzes Vice President Gore's proposals for Social Security. At one point it examines the logic of having a separate fund that is designated to pay for Social Security. An important distinction that it doesn't mention is that the money paid into the fund directly from payroll taxes comes disproportionately from low and moderate income workers, since the payroll tax is very regressive. By contrast, money to repay bonds held by the fund or additional contributions from general revenue will be derived mostly from progressive personal and corporate income taxes.

This distinction will make an enormous difference to future generations of workers. The effective income tax rates for the poorest and second poorest quintiles are negative 6.9 percent (due to the earned income tax credit) and 1.7 percent, respectively. By contrast, their effective payroll tax rates are 7.7 and 9.6 percent, respectively. The richest fifth of households pays an effective payroll tax rate of 7.7 percent, but a personal income tax rate of 16.4 percent and a corporate income tax rate of 3.3 percent (State of Working America 1996-97, Lawrence Mishel, Jared Bernstein and John Schmitt, 1996, M.E. Sharpe, p. 116). In short, the source of future revenue for Social Security will make a huge difference.

The article also includes a comment from Rudolph G. Penner that the taxes needed to meet Social Security's obligations will be painful for future generations. It is worth noting that the projected shortfall is less than 1.0 percent of national income over the 75-year projections period. Even with extremely pessimistic projections, workers on average will have incomes that are 35 percent higher in 2030 than today.

If their income is reduced from this level by approximately 1.0 percent due to higher taxes, it is not apparent that it would be especially painful. As a result on increasing wage inequality, the typical worker saw a 5.5 percent decline in real hourly wages from 1979 to 1997. This means that the pain Penner fears from higher Social Security taxes is less than one-fifth as large as the pain many working families experienced due to rising wage inequality over the last two decades.

More about Social Security.



"Hints of New Inflation May Draw Sharp Fed Reaction"
Richard W. Stevenson
New York Times, May 15, 2000, page A15

This article examines the factors that are likely to affect the Federal Reserve Board's decision on interest rates at its meeting this week. At one point it refers to "a flood of business investment that has allowed the United States to reclaim its position of economic pre-eminence." It's not clear what measure the article is applying to make this determination. Productivity growth in the United States has not generally exceeded the productivity growth in western Europe through most of the '90s. Furthermore, the United States is running a record trade deficit of 3.5 percent of GDP, which suggest that U.S. goods are faring rather poorly in international competition.

The article also suggests that the Alan Greenspan believed that the economy may be able to grow faster than was generally recognized, because actual productivity growth was more rapid than measured productivity growth. This view is wrong. If productivity growth was being undercounted, then GDP growth was also being undercounted by almost exactly the same amount.

For example, if productivity growth was being reported as 1.0 percent annually when it was actually 2.0 percent, this would imply that actual GDP growth was approximately 1.0 percentage point higher than reported GDP growth. So, if GDP growth had been reported as 2.5 percent, with correct measurements it would be reported as 3.5 percent.

The article also includes an important factual error. It comments that "the Fed has not shied away from raising interest rates during presidential campaigns--it did so through much of 1992." Actually, the Fed cut interest rates through 1992. The Federal funds rate, which it directly controls, was 4.0 percent at the start of 1992, and had fallen to 3.0 percent by election day.



"Snapping Up Chinese Goods Despite Qualms on Trade Bill"
Joseph Kahn
New York Times, May 17, 2000, page A1

This front page article tries to portray the shopping habits of consumers as being in contradiction to their views on the bill that would establish permanent normal trading relations in China. The article reports on several Wal-Mart customers' reservations over U.S. trade with Chinese as they purchase products made in China.

The contradiction that the article implies does not exist at all for two reasons. First, the bill before Congress is not addressing whether the United States should trade with China, it is addressing the rules that govern this trade. It would make as much sense to claim a contradiction exists if someone eats food and at the same time favors the removal of agricultural subsidies.

Second, it is widely recognized that consumers, left with their individual choices, would buy large amounts of Chinese goods. This is apparent to anyone remotely familiar with trade data. It should not have been necessary to visit Wal-Mart to realize this fact.

From the standpoint of the individual consumer, it is entirely to rational to purchase an item produced in China, even if he or she strongly objects to the conditions under which the item was produced. Their individual decision can have no possible impact on the continuation of the practices in China to which they may object. The point of collective action through government is to change the logic that underlies this decision.

For example, most people would not voluntarily agree to pay a portion of their income to the government; nonetheless they support mandatory taxation. Consumers may collectively agree that they would be willing to pay somewhat more for clothes or toys if they knew that they were produced by workers who enjoyed basic human rights.

There is no apparent news content to this article. Its placement on the front page less than a week before the vote on permanent normal trading relations with China is a peculiar editorial decision.

"Deal Brews to Give Fairer Deal to Farmers"
John Burgess
Washington Post, May 15, 2000, page E1

This informative article examines the growth of coffee purchases in the United States that are subject to "fair trade" rules which guarantee a certain price to the growers. At one point, the article comments that "a 25-cent premium per cup can more than make up for the extra cost of fair-trade beans." According to the article, the fair-trade price for coffee is currently 31 cents a pound above the world market price. It is possible to get more than fifty cups from a pound of coffee, which suggests that a premium of just 1 cent per cup should be sufficient to cover the higher price of fair-trade coffee.

More about trade.



"Sharing of Profits Is Debated as the Value of Tissue Rises"
Gina Kolata
New York Times, May 15, 2000, page A1

This informative article examines some of the issues surrounding the ownership of genetic material. It reports that many volunteers have tried to gain a portion of the royalties when genetic material they provided was subsequently patented. The article allows the basic issue to be framed by a law professor who asserts that "the fact is that we rely on the private sector to develop diagnostic and therapeutic products, and the private sector is profit driven."

This assertion is extremely misleading. Most bio-medical research is funded by universities, private foundations and charities, or by the federal government. Less than half is financed directly by the pharmaceutical industry, where it can be assumed that profit is the main motivation for research. This article raises several ethical, legal and economic problems that arise from patent supported research in this area; most importantly, that volunteers who are willing to take part in experiments to advance medicine may not be willing to take part in experiments that could lead to large monetary payoffs to the researchers. The problems discussed in this article suggest that patents may be an inefficient way to support bio-medical research.



"The Fed, in a Supporting Role for the Euro"
Jonathan Fuerbringer
New York Times, May 14, 2000, Section 3 page 8

This article repeats the assertion that the relative value of the dollar and the euro depend on their relative growth rates. There is no economic theory that would support this claim. Investors place their money based on expected rates of return, which have no direct relationship to economic growth. Placing money in a nation's currency simply because it has a high rate of growth would be like investing in a city because they have a winning football team. (See ERR, 5/15/00.)

More about Europe.



"Pesticide Coalition's Text Enters House Bill"
George Lardner Jr. and Joby Warrick
Washington Post, May 13, 2000, page A1

This article reveals that a bill weakening Environmental Protection Agency's enforcement powers was drafted by lobbyists for pesticide manufacturers, agricultural organizations and food processors.

"Levitating Earnings: An Act or a Fact?"
Gretchen Morgenson
New York Times, May 14, 2000, Section 3 page1

This article reports on a variety of questionable accounting practices, such as including portfolio gains, which corporations are using to increase reported profits.


Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.

ERR is edited by Jim Naureckas.

More analysis of the New York Times and Washington Post can be found at and

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