Borrowing To Reform Social Security

Copley News Service, 05/10/2001

Last week President George W. Bush appointed a commission to make recommendations on how to modernize and restore fiscal soundness to the Social Security system. Already liberals are protesting that the commission is stacked in favor of privatization. They also argue that diverting money from the current system into personal accounts would only deepen Social Security’s financial hole.

Social Security’s problems have been well-known and extensively analyzed for many years. Based on the evidence, the president believes personal accounts hold the best prospect of restoring fiscal soundness to the program. Of all the ideas on which Bush campaigned, personal retirement accounts receive the broadest support. Exit polls from the election showed almost 60 percent of voters favored personal accounts.

A recent United Seniors Association-McLaughlin Associates poll found that 82 percent of seniors believe personal retirement accounts are important for their children and grandchildren to have a more secure retirement. Liberals are out of line to claim that the president is acting improperly by asking his commission to recommend the best way to do what the people say they elected him to do.

Liberals also complain that personal accounts will make the problem worse. The Washington Post recently opined that by diverting a share of payroll taxes to set up personal retirement accounts, the Bush proposal will reduce the money available to pay current benefits. Therefore, the Post said, personal accounts must either be added on top of the existing program or be accompanied by tax increases and/or benefit cuts. This is false-choice politics at its worse.

My conservative friends, however, will walk right into this false-choice trap if they fail to acknowledge the simple truth that diverting payroll tax revenue into personal accounts will require coming up with additional money to pay current benefits.

During the next eight years, annual Social Security surpluses will average about one-sixth of total payroll-tax revenue, or about 2 percentage points of the 12-percent payroll tax. Thereafter, the Social Security surpluses will begin drying up as retiring baby boomers swamp the system. Then what?

If the administration locks itself into the box of limiting personal accounts to only what can be paid for out of Social Security surpluses, its proposal will be only about one-third the size required to reform the system, and it will be a dead-end proposal once surpluses run out beyond 2015.

The commission should recommend the immediate diversion of one-half the payroll tax — 6 percentage points — into personal retirement accounts and recommend paying for it by borrowing the money. A coming study from the Institute for Policy Innovation ( compares this option to the alternative of waiting until the payroll-tax shortfall emerges in 2015 and then borrowing money or raising taxes to continue financing Social Security as we have known it since the New Deal.

According to the IPI study, if we are to avoid slashing benefits, maintaining Social Security as a pay-as-you-go tax-financed government retirement program without personal accounts would send the national debt soaring to 150 percent of annual GDP or require that the payroll tax be increased by more than 50 percent to 18 percent. A tax hike of this magnitude would seriously harm economic growth, and it also would demolish the rate of return workers could hope to receive on their retirement savings. In present value terms, borrowing of this magnitude would amount to almost $11 trillion in today’s dollars.

By contrast, the IPI study concludes, “If workers were allowed immediately to place 6 percentage points of the payroll tax into personal retirement accounts, the government could safely borrow the transition costs required to pay current benefits each year (amounting to average annual borrowing of 1.2 percent of GDP between now and 2035), and the nation could still keep its debt burden within a few percentage points of today’s level (34 percent of GDP) for the next 25 years, after which it would begin to fall precipitously . . . and the return on the private retirement accounts by then would have mounted sufficiently that overall retirement income would rise by almost one-third.”

Since workers would very likely diversify a substantial portion of their personal retirement account portfolios into federal bonds, the shortfall in payroll taxes would in large part be made up by borrowing funds directly from the personal accounts.

This would have the added benefit of transforming the Social Security debt, currently held as IOUs in the Social Security Trust Fund, into full-faith-and-credit bonds of the U.S. government and privatizing the Social Security debt, as it should be.

As the co-chairman of the Social Security Commission, former Sen. Daniel Patrick Moynihan has said in the past about reforming Social Security, “It is time for courage as well as policy analysis.”

Copyright 2001 Union-Tribune Publishing Co.