Dean Baker, J. Bradford DeLong, and Paul Krugman (2005), "Asset Returns and Economic Growth"
Justifications for the Long-Run Productivity Growth Forecasts in the Trustees' Reports

The White House Thinks About the Clawback

Greg Ip and Jackie Calmes of the Wall Street Journal report signs of thought about issues of substance inside the White House: - Bush May Alter Private-Accounts Plan: As currently envisioned, an account-holder would need a real return -- that is, return after inflation -- of 3% to exceed the offset in the traditional benefit. But many outside experts say 3% is too high, and will limit the accounts' appeal. They noted Treasury bonds are now expected to return only about 2%, and stocks a few percentage points more. Thus, a private account of half stocks and half bonds would run a significant risk of returning less than 3%, leaving the account-holder worse off than someone who stuck with the traditional benefit.

Some experts have urged the administration to use a lower offset rate. That would make the accounts costlier to finance as long as Social Security sticks to its assumption that real Treasury yields average 3% in the long run.

Mr. Hubbard said the administration picked 3% because Social Security actuaries estimate that figure to be the government's long-term cost of borrowing. It is the figure that makes private accounts 'fiscally neutral,' he said.... Mr. Bush's proposed accounts are closely patterned on the second of his 2001 Social Security commission's three proposals, although that model used a 2% offset rate. A former administration official says a change to the offset rate to between 2% and 3% has been discussed, with special attention on 2.7%.

It really does look as if they chose 3%, and then never ran the numbers--never ran the numbers at all to see what the distribution of private account returns would be.

One underlying problem, of course, is that private accounts shift risk onto beneficiaries, and that beneficiaries are more averse to risk than the government. Thus it is genuinely hard to make private accounts both attractive to those non-rich beneficiaries who are most averse to risk and also fiscally neutral.