Bill Clinton believes that the best use of the projected $3.7 trillion in Social Security surpluses over the next 15 years – equal to $25,700 in extra payroll taxes for every worker in America – is to buy down the national debt. He argues that his plan will protect the system by assuring that Social Security’s surpluses will continue to build up in the trust fund while simultaneously reducing the government’s debt burden in preparation for the Baby Boomers’ retirement.
The president’s plan will do neither. First, adding $3.7 trillion in IOUs to the Social Security trust fund is not the same as creating real assets that can be drawn down in the future to pay benefits. On the contrary, these IOUs are actually liabilities to the next generation of workers who will be forced to pay higher income taxes when Social Security redeems the IOUs to cover its $8 trillion shortfall between 2014 and 2034.
On the other hand, if lawmakers choose not to raise taxes to cover the program’s cash shortfall, we simply face the prospect of running up $8 trillion in new debt over that 20-year period to pay the system’s bills. This makes about as much sense as putting an extra $1,000 a year toward your mortgage just so you can take out a second mortgage in 15 years to finance your kid’s college costs.
A better use of Social Security’s surpluses is to finance a payroll tax cut of about 3.5 percentage points and allow people to save this money in personal retirement accounts.
If every worker was allowed to invest their share of Social Security’s surplus in a personal retirement account, and these accounts earned just 8 percent annually, workers would own $6 trillion in assets by the time Social Security becomes insolvent, and $55 trillion in assets by the time the “trust fund” is expected to become exhausted.
Working Americans will be far better off owning real assets than being saddled with a mountain of IOUs.