Saturday, February 26, 2005


Smith: AARP to expand attack on Bush plan

The Plain Dealer reports that AARP president Marie Smith told an audience at the Cleveland City Club that the group would be expanding its $5 ad campaign aimed at the White House's proposal that would phase out Social Security. Smith warned,
Unfortunately, private accounts that drain money out of Social Security clearly are a 'solution' that is far worse than the problem.
Apparently supporters of the Bush plan are in short supply in Cleveland. The reporter noted that even at least one self-described conservative Republican said he was in Smith's corner on this issue.

Smith advocated for allowing Social Security to invest its trust funds into a "total market index fund" which the reporter says is "similar to most pension funds." In general, we think this suggestion makes a lot of sense if done properly. We suspect that Smith's proposal in this area is more robust than what was reported.

But, so no one gets the wrong idea, the best pension funds don't just invest in a "total market index fund" since there isn't one. First, there isn't just one "market". There is an public equities market (like the stock exchange), there is a private equities market (like venture capital), there is a real estate market, there is a bond market, and their are foreign markets. Even this is an over-simplified list. Second, you can't can't put all your eggs in one basket. To dissapate risk, you have to spread your investments out in these different markets so that if one goes south, you don't lose all your investments. Risk management is a huge undertaking in this regard.

Smith also called for raising the cap on taxable income for Social Security from $90,000 to $140,000. According to the story, Smith believes that this would lower the "shortfall" by 43%, but because of either slopping editing or slopping reporting, there is no indication what shortfall Smith is referring to.

We assume the reporter used the term shortfall to refer to the decrease in payments that some estimate would occur around 2042 when payouts could only not exceed revenues. This "Intermediate" projection suggests that payments would be 70%-80% of the theoretical benefit after that date.

It's unclear how wedded Smith is to the $140,000 cap. Josh Marshall dissects a new Social Security memo on the effects of eliminating the cap altogether, and he concludes that this change, alone, would keep the program fully solvent over the 75-year time horizon.


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