William A. Alexander – 5/8/05

This page was last updated on May 9, 2005.

Social Security plan a bust; William A. Alexander; Beaver County Times; May 8, 2005.

This is at least the fourth letter from Mr. Alexander opposing any Socialist Security changes other than tax increases and benefit reductions.

Can someone explain the extreme fear expressed by folks like Mr. Alexander to giving workers the opportunity to choose how a small part of their Socialist Security taxes will be invested? Remember, it’s the worker’s money! He earned it!

Below is a detailed critique of the letter.

“The lies of Bush, Santorum and Hart continue to come out. To use an oldie, referring to the middle class, the beatings will continue until moral [sic] improves.”

[RWC] A “drive by” allegation. You’ll note not once in this letter does Mr. Alexander document any lies by Messrs. Bush and Santorum and Ms. Hart.

“Bush’s Social Security benefit cuts were finally disclosed. Using today’s dollars and numbers from the Social Security actuarial reports it works out as follows:”

[RWC] I don’t know where Mr. Alexander got most of his information. Mr. Alexander claims his calculations are a result of President Bush’s suggestions, but I checked the White House website info on this topic and could not find the info required to make the calculations cited by Mr. Alexander. Even so, I can show Mr. Alexander’s calculations appear to be bogus.

“The average salary of a wage earner today is $37,000. At 67, their benefits would be cut 23 percent or $308 a month.”

[RWC] I believe this section of the letter is worded clumsily on purpose.

Mr. Alexander blurts out there will be Socialist Security “cuts” but doesn’t describe what he considers a cut. In this section, the “cut” appears to be the reduction in Socialist Security “classic” benefits as the result of a worker directing a portion of his SS taxes into a personal account.

As I noted above, I don’t know where Mr. Alexander got the alleged benefit cuts he cites in his examples.

“If they had invested the maximum $1,000 per year in a private account and it earned Bush’s 6 percent return, which is above the average people achieve, their account would make up this difference for about 18 years, or until they reached 85.”

[RWC] Note Mr. Alexander’s editorial comment that the average person doesn’t achieve a 6% return.

I mentioned above I wasn’t in a good position to refute or verify Mr. Alexander’s calculations, but as you will see below it’s clear they have some real problems.

First, there’s at least one error in Mr. Alexander’s calculations; he assumes a constant $1,000/year put into the personal account. $1,000 is only an initial maximum for 2009. According to the current proposal, the max would increase $100/year. The max would increase further as the economy’s overall wages increase. Mr. Alexander’s error means his calculations significantly underestimate the value of the personal account at retirement.

The second problem with the calculations is Mr. Alexander doesn’t provide a time period for the personal account. That is, does he assume 10 years, 20, et cetera? Because of compounding interest, the assumed time period can make a huge difference.

To show the problems with Mr. Alexander’s calculation, I did some calculations of my own. To be as consistent as possible with Mr. Alexander’s data, I’ll use the $1,000/year and 6% figures he claimed to use in his calculations.

To calculate the value of the personal account at retirement, I assume a working life of 46 years (21 to 67), a semi-monthly paycheck (This means $41.67 twice per month into the personal account.), and I used the FV (future value) function in Microsoft Excel.

Using the assumptions above, the personal account at age 67 would be worth $245,778! That’s nearly a quarter of a million dollar nest egg by a worker making only $37,000/year! Indeed, a worker making as little as $25,000/year could have the same nest egg at retirement.

Since this result did not seem anywhere near consistent with Mr. Alexander’s nest egg – whose value he never cited – that provided only $308/month for 18 years, I attempted to calculate Mr. Alexander’s nest egg. To make this calculation, I assumed funds remaining in the personal account would continue to grow at 6% and the $308/month would be drawn once per month. At the end of 18 years, the personal account would be empty. I used the PV (present value) function in Microsoft Excel.

Based on my calculations, the personal account nest egg calculated by Mr. Alexander appears to be just under $41,000. This means Mr. Alexander assumed a working life of only about 21 years. Other than to deliberately underestimate the personal account value, I don’t know why Mr. Alexander would use a working life of only 21 years.

Without withdrawing any principal, the nest egg I calculated would provide $1,229/month for as long as the worker lived. The interest alone is four times the $308/month Mr. Alexander alleges is lost by opting into the personal account. If the worker never touched the principal, he would be able to pass on nearly a quarter of a million dollars to his heirs.

In a previous letter, Mr. Alexander told us the average guy gets only 3.6%. Even at 3.6%, the worker has a nest egg at retirement of $117,560. Interest alone on this personal account would provide roughly $350/month for as long as the worker lived. That figure is a little over breakeven with Socialist Security except that when the worker dies he still has $117,560 to pass to his heirs. We need to remember this is in addition to the worker’s retirement investments outside of Socialist Security.

Remember that both examples I gave would be higher because the max of $1,000/year would increase as I noted above.

Given these examples, I suspect I know why Mr. Alexander didn’t provide the details of his calculations.

“For someone making $58,000, at 67 their benefits would be cut 36 percent or $628 per month.

“They would still only have invested the maximum $1,000 and the 6 percent return would make up the difference of their benefit cut for 9-plus years, only until they reached 75.”

[RWC] Another calculation error somewhere. 67 + 9+ years equals 76+ years yet Mr. Alexander says its 75.

“For those making the maximum $90,000 and above, benefits would be cut 42 percent or $895 per month, and their private account would make up the difference for about 6.5 years, only until they reached 73.5.

“Bush is making his cuts mainly to the middle class, and even with his private accounts his projected returns will not come close to replacing his benefit cuts for our longer life expectancy.”

[RWC] What is Mr. Alexander’s definition of middleclass? Even his own questionable calculations show the greater your income the greater the “hit” on your Socialist Security “classic” benefit.

Of course, Mr. Alexander completely ignores the fact that personal accounts would be voluntary. If the numbers Mr. Alexander presented are true, a number of workers will choose not to opt in to personal accounts. As I asked above, why are Mr. Alexander and his fellow travelers so afraid to let the individual worker make his choice?

“I believe the real solutions to Social Security can be found in the estate taxes of more than $3.5 million, raising the ceiling on Social Security deductions, gradually raising the retirement age to 70 and possible benefit reductions for higher earners, and not once more putting all the burden on the backs of the middle class.”

[RWC] Did Mr. Alexander read his own letter? Even if we assume his data and calculations are valid, they do what he claims he wants to see! The more money you make, the more you pay and the less you get from Socialist Security “classic.”

Depending on when you were born, the current retirement age for full benefits ranges from 65 to 67. If we raise the retirement age to 70, isn’t that another benefit reduction in that you pay in anywhere from three to five years more of taxes and receive anywhere from three to five years less of benefits? Won’t that affect the middleclass?

Mr. Alexander once again lobbies for increasing the max taxed earnings cap, but fails to mention it already rises every year by law. It more than doubled in the last 18 years alone and increased nearly $14,000 since 2000!

Also, Mr. Alexander appears to ignore the effect of the means testing President Bush endorsed for Socialist Security. This means that the greater your retirement income, the lower your benefit increases. This affects the “rich” the most and the “poor” the least.

Mr. Alexander is so bent on “Bush is wrong” that he doesn’t see his own letter makes no sense.