People of good will can genuinely disagree about the wisdom of private accounts or other Social Security reform measures, but before we get too far into that dialog, we should at least make sure we all agree on some basic truths regarding the existing system.
I am continually dismayed by the amount of disinformation out there on this topic. I assure you, that is no accident. The government is not anxious to draw attention to how the system really works.
What I'm going to tackle now is this notion of a Social Security "trust fund." Many people believe that an account exists somewhere, flush with funds from FICA payroll tax surpluses, strengthening the Social Security system for decades into the future.
Well, it's not true. I know many of you already know this, so you should feel free to skip this post, but I'm going to address the myth of "transition costs" later, and this is a prerequisite.
Each year, Social Security takes in more money in payroll taxes than it needs to meet the current obligations of the system. The leftover surplus is then "invested" in the so-called "trust fund." This mode of investment, however, is a dubious one. The surplus is used to purchase a certain type of government bond. Like all bonds, these are debt instruments. Essentially, it means the monies are transferred into general revenues, where they are immediately spent by Congress on wars, farm subsidies, debt service, whatever. The Social Security trust fund contains no actual money, merely IOUs from the government, promising that someday they'll pay back the money they've already spent.
I would like to think the problem with this should be obvious. The fund we're led to believe safeguards our payroll taxes and will pay our benefits when we retire is nothing more than a pile of debt.
Some of the president's opponents, Josh Marshall being a notable example, have had some grand fun mischaracterizing our position as "government bonds are worthless pieces of paper." As is often the case, Marshall completely misses the point. Government bonds can be a sound investment vehicle for you, me, Josh Marshall or the government of China. For the government to purchase treasury bonds as an "investment," however, makes no sense.
If you write me an IOU, that piece of paper has value to me. If you write one to yourself, however, you've accomplished nothing. When the time comes for Social Security to redeem these bonds, how will they be paid for? There are three options:
- cut government services
- raise taxes
- borrow more money
or some combination of the three. In other words, the vaunted "trust fund" is nothing more than a promise that the government will someday pay Social Security back with money that it doesn't have.
This is more than merely dumb; it's dishonest. Referring to an enormous unfunded mandate as a "trust fund" is disingenuous in the extreme. It encourages us to believe it's an asset when it's really an obligation. It also masks the true size of the federal budget deficit, by moving the Social Security surplus into general revenues, where it doesn't belong.
Think of it as a corporation that raided its pension fund until there was nothing left in it, and then said, "Don't worry. We'll pay that money back out of our revenue stream when the time comes." The difference is that in the corporate world, people would go to jail for that type of shenanigans.
This is exactly why Al Gore wanted a Social Security "lockbox." The lockbox is merely an annoying metaphor for actually saving the Social Security surpluses instead of spending them. He knew that the surpluses were being spent as fast as they came in, and he recognized that this practice was unwise for the future of the program.
It's hard to argue with that in principle, but in practice, the lockbox raises some interesting questions. Where would we invest the funds? If we were to choose government securities, we'd be right back in the same mess we're in now. If we were to choose private securities, we'd face some uncomfortable questions about how the government would choose which corporations to own stock in, and whether widespread government ownership of private corporations is a good idea. Moreover, the critics of private accounts would have to explain why it's okay for the government to invest our contributions in the stock market, but it's somehow sinister for us to do so individually.
Despite these details, I think the lockbox idea is sound, but it probably never stood a chance of becoming reality, even if the 2000 elections had worked out differently. It's not very likely that Congress would vote to deprive itself of a revenue stream of borrowed money, particularly when most Congressmen will be long retired when the bills start coming due.
It must be pointed out, however, that the private accounts the president proposes will accomplish much the same thing, albeit on a smaller scale. The money that workers choose to divert to private accounts will be out of reach for the Washington spenders. It will be in a highly distributed "lockbox." Unlike the bogus "trust fund," this is real money that will be safeguarded against the day that it's needed, and it can never be converted into debt.
The president's plan provides for no more than 4% of one's income to be diverted to private accounts, but that 4% would represent a partial return to fiscal sanity, as our payroll taxes will begin to build genuine wealth as opposed to accumulating government debt.
I support private accounts, but they are not a cure-all for everything that ails Social Security. Nonetheless, they can help move us down the road of honest accounting. One way or another, the money we pay into the system should be set aside for our old age, not immediately consumed by a spendthrift government. Private accounts can help.
The transition costs of such a program? That's a subject for the next post. (God, I'm starting to sound like Paul Krugman!)