Accuracy in Media

Last Thursday, August 6, the American Enterprise Institute (AEI) hosted a presentation by resident scholar Andrew Biggs on his paper entitled “The Case for Simplying Social Security Benefits.” Prominently featured by Biggs were the problems with estimating Social Security benefits due to the byzantine calculations involved.

In discussing his political priorities, the former Social Security Administration official cited equity and predictability as the two relevant factors. “First, we want to make benefits more predictable, and secondly, we want to improve the social insurance value of the program,” he said. To explain his use of “social insurance,” Biggs referred to his Powerpoint presentation, which described “social insurance” as a program which “insures against low life-time earnings,” but not commenting on whether this implied that Social Security was a form of guaranteed minimum income. However, he did suggest that many beneficiaries might not know how much such a guaranteed income would be.

“The question is, ‘how well can people actually predict their social security benefits?'” Biggs said.

Another major theme which Biggs returned to continually throughout the talk was the importance of a progressive social security system. “You have to rely on the fact that if I’m a low earner, I’m going to get high replacement rates,” Biggs said. “How consistent is that progressivity?” Biggs asked, later suggesting that this particular commitment was being insufficiently pursued.

“How can people with the same earnings get different benefits?” Biggs asked.

The answer to this rhetorical question, according to Biggs, was that Social Security benefits were based on incorrect and obscure metrics. “This is not a simple calculation to make,” Biggs said. “One quarter of people overestimated their benefits by 28%… for these sorts of people, the defined benefit aspect of social security isn’t terribly useful.” As a replacement, Biggs suggested voluntary retirement savings accounts, an idea which had been previously suggested, but never implemented, during the Bush administration.

Even as only an idea, the plan attracted criticism. Liberal critics suggested that the idea of a private savings account would only lead to greater exacerbation of wealth disparities, and “strip away” wealth from the poorer members of society. However, the “Kiwisaver” program–a partially privatized social security system which has been implemented by the government of New Zealand–lacks either of these problems. According to the New Zealand website The Independent Kiwi Saver,” the program is funded mostly by employers and taxpayers, with the Government only providing a $1,000 “one-off kick-start” and a $20/week employer subsidy.

Under such a system, benefits are easily calculable because beneficiaries more or less rely on withdrawals from their own account. By contrast, according to the AEI statement, the Social Security benefit formula “requires calculating your average wage-adjusted earnings for your highest-paid thirty-five years, accounting for spousal benefits, inserting it into an additional three-part formula, and adjusting for your retirement age.”

“Even with a spreadsheet, it would be difficult for most Americans to calculate,” Biggs said. “This is not a simple calculation to make.”

Finally, Biggs suggested that one of the unintended problems with Social Security was that otherwise rational behavior led to the system’s progressive nature being undermined. “The more risk-averse people are, the less progressive the system appears to be,” Biggs said.

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