Krugman's Social Security Analysis FlawOver at Lifelike I put
up a post on Krugman's ridiculous column on Social Security. Here's the key part of Krugman's column:
Let's consider the Bush tax cuts and the Bush benefit cuts as a package. Who gains? Who loses?
Suppose you're a full-time Wal-Mart employee, earning $17,000 a year. You probably didn't get any tax cut. But Mr. Bush says, generously, that he won't cut your Social Security benefits.
Suppose you're earning $60,000 a year. On average, Mr. Bush cut taxes for workers like you by about $1,000 per year. But by 2045 the Bush Social Security plan would cut benefits for workers like you by about $6,500 per year. Not a very good deal.
Suppose, finally, that you're making $1 million a year. You received a tax cut worth about $50,000 per year. By 2045 the Bush plan would reduce benefits for people like you by about $9,400 per year. We have a winner!As I pointed out, this analysis links two different things; the tax cuts have nothing to do with Social Security benefit cuts; the bills aren't linked, the tax cut is a fait accompli while the Social Security benefits cuts are just being discussed. There is no connection between the two, and Krugman's just engaging in a little intellectual dishonesty here.
And
Tim Worstall points out that the deal being offered to the $60,000 a year guy is not too bad. Remember that the $1000 per year tax cut applies to the person's entire working life, while the $6,500 per year benefit reduction comes only after age 65. Further, the $1,000 could be invested to fund the $6,500 loss of benefits years later.
I did a quickie spreadsheet, assuming one started investing $1,000 per year at 5% interest (including inflation) from age 25-64, after which the person would start drawing down $6,500 per annum. Here are the first couple rows of the spreadsheet:
Age Contrib Int End Bal
25 1,000 - 1,000
26 1,000 50 2,050
27 1,000 103 3,153
28 1,000 158 4,310
29 1,000 216 5,526
30 1,000 276 6,802
Skipping ahead:
63 1,000 5,385 114,095
64 1,000 5,705 120,800
So now we've got a $120,000 nest egg to fund the $6,500 in benefits reduction. How long would that last?
Answer: If you keep investing at 5% interest, it would last until you are 118 years old. If you die at age 80, you'd still have $110,000 sitting in your account. If you died at age 90, your heirs would be splitting $97,000.
So by Krugman's own account, the deal is a pretty good one for the middle class.
Update: Tom Maguire
has more, including a hilarious bit on Krugman as a three-card monte dealer.
