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Social Security Ads: Risk or Protection?

Pro-Bush group's first TV ad states the problem correctly. But the AARP uses a misleading photo.

January 15, 2005

Modified: January 15, 2005

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Summary


A pro-Bush TV ad gets the central fact right about Social Security: by the time today's young workers retire there are projected to be only two workers paying Social Security taxes for every one person receiving Social Security Benefits. Today there are 3.3 workers per beneficiary.

But a different ad opposed to Bush's efforts uses a misleading photograph. It shows wild trading in commodities like cocoa futures to depict the risk that workers could face with private Social Security accounts. Actually, what's being proposed is not  investment commodities, but in far less risky stock and bond mutual funds, which would be broadly diversified.

Analysis

 

These ads constitute the opening of what may eventually become an enormously expensive public lobbying campaign over the future of Social Security. So far, we find only minor factual problems.

 Progress for America Ad "Courage"

Announcer: It took courage to create Social Security.

(On screen: Footage of former President Franklin D. Roosevelt signing Social Security Act of 1935)

Franklin D. Roosevelt: This Social Security measure...

Announcer: It'll take courage and leadership to protect it.

(On screen: Footage of George W. Bush at a bill signing ceremony)

Announcer:Once, sixteen workers supported one retiree. But when today's workers retire, only two workers will support one retiree.

(Text on screen: 1950: 16 workers supported 1 retiree; 2 workers will support 1 retiree)

Washington must strengthen Social Security: No changes for those at or near retirement, but younger workers should have the option of a personal savings account.Call Congress today. Urge them to strengthen Social Security for everyone.

Progress for America

This is a lobbying organization allied with the Progress for America Voter Fund, which spent nearly $50 million during the 2004 campaign on ads bashing John Kerry and praising President Bush. This new ad began airing on CNN and Fox on Jan. 10.

Some may find the ad's comparison of Bush and Franklin Roosevelt to be a stretch, since Bush has yet to propose a specific Social Security plan, let alone secure passage. And in fact, Roosevelt's grandson, James Roosevelt Jr., wrote the ad's sponsor saying, "My grandfather would surely oppose the ideas now being promoted by this administration and your organization." But that's a matter of opinion and PFA is entitled to theirs. It's also a matter of opinion whether Bush's eventual plan will "protect" Social Security or not.

Where it states facts, the PFA ad gets it essentially right. The ad says: "Once, 16 workers supported one retiree. But when today's workers retire, only two workers will support one retiree."

That's right -- except that workers who pay into Social Security are supporting not only "retirees" but also are supporting millions of disabled workers and surviving dependents. To be strictly accurate the ad should have said "beneficiaries" instead of "retirees."

But the central point is quite true -- demographic trends make it certain that the current system cannot be maintained without increasing taxes or cutting the growth of future benefits.

As recently as 1950 there were 16.5 workers paying Social Security taxes for every one person receiving Social Security benefits, according to statistical tables published annually as part of the Social Security trustees report . Currently, there are 3.3 workers paying in for every one beneficiary receiving benefits, and the situation will worsen dramatically when the post-World War II "baby boom" generation begins reaching age 62 -- the age when many choose to begin receiving early retirement benefits -- in about three years.

And just as the ad says, within 15 years that ratio is projected to decline to 2.2 workers paying in for every one person getting benefits. And it is forecast to continue declining to 2.0 workers in 2040, when workers who are now in their 20's reach retirement age.

That's a pretty solid projection -- All those who will receive benefits in 2040 have already been born and counted. Changes in projected life expectancies, immigration rates or birth rates could throw it off some, but not much, and not soon. The projection uses "intermediate" assumptions, but even under a "low cost" set of assumptions (birth rates 13% higher, improvements in life expectancy slow by half, and immigration increases 44%) each of today's young workers would have only 2.4 workers supporting them at retirement in 2040. Either way, the system faces an enormous financial crunch.

A Misleading Photo

Meanwhile, the AARP opened a series of full-page newspaper ads attacking Bush's concept of private Social Security accounts. One of them said "winners and losers are stock market terms. Do you really want them to become retirement terms?" But the ad used a misleading photograph.

Instead of stock  traders, the photo shows a wild trading pit and a board listing "cocoa," "sugar," "coffee" and other commodities. But none of the options under consideration would allow owners of private Social Security accounts to speculate in commodities, which are notoriously volatile and risky. The kinds of ideas under discussion all call for accounts to be invested in broadly diversified stock and bond funds. There's a big difference.

The AARP is correct to suggest that even stock and bond funds carry risk. For example, the Dow Jones Industrial Average (an index of 30 stocks) lost nearly 23% of its value in a single day, Oct. 19, 1987. More recently the Dow Jones average lost nearly 38% of its value in a long slide that bottomed out Oct. 9, 2002. And despite big gains since the bottom, on Jan. 14 the Dow Jones average was still 9.9% lower than it was when it hit its historical peak exactly five years earlier.

However, the stock market also holds the promise of substantial gains for those who invest and hold stocks for the long term. According to Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, from 1802 through 2003, the broad stock market provided “real” returns – adjusted for inflation – averaging 6.8 percent a year. “On average, you have doubled your purchasing power every decade in the stock market,” Siegel said during a recent talk. He said that while stocks have failed to meet that average over a few long periods, performance has been remarkably consistent.

Sources

Table IV.B2.--Covered Workers and Beneficiaries, Calendar Years 1945-2080 , "THE 2004 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND DISABILITY INSURANCE TRUST FUNDS," 23 March 2004; 46.

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

"Five Years On, DJIA Opens 10% Below Its Peak," OsterDowJones Commodity Wire, 14 Jan 2005.