Social Security "Reform"

First, I must confess to a complete lack of credentials or training that would qualify me to address this subject; but President Bush has announced that “reform” of the Social Security System is one of his top priorities for his second term.

President Bush has indicated that the SS system is in crisis, that it must be reformed, and is recommending a system recommended by the CATO Institute, within which future workers would establish “private accounts” into which will be paid at least a portion of what is now paid into the SS system. The funds within the “private account” would be invested by the individual into a range of government approved investment vehicles representing a range of risk, from government bonds to stock market equities.

Of course, the current SS system involves your payment of payroll taxes to the government which the SS Administration invests in government securities. During the 1980s Congress raised the payroll tax to amass a surplus in preparation for the retirement of the large Baby Boom generation. The surplus in funds that has since accumulated has been spent by Congress, over the years, on other programs and the funds have been replaced in the SS Trust Fund by IOUs guaranteed by the U.S. Treasury. When Baby Boomers retire the Congress must find funds with which to redeem the IOUs so that retirees may receive benefits.

SS Administration actuaries say that current payroll taxes will more than cover promised benefits until 2018, that taxes plus interest on the trust fund's U. S. Treasury IOUs will cover promised benefits until 2028 and that the trust fund won't run dry until 2042.

So the problem is not that the SS system is facing imminent collapse, the problem will be finding the money with which to redeem the IOUs in the SS Trust Fund, from which Congress and Presidents have so freely borrowed over the years, so Baby Boomers receive promised benefits. The redemption funding will have to come from other government programs (military and health care, to cite two major areas of federal expenditure) or from higher taxes. Of course, the retirement age could be increased to push the problem off a bit further into the future.

President Bush’s proposal to partially “privatize” Social Security would require, according to the White House, about $2 trillion to pay for the “transition” from the current system to a system incorporating “private accounts.” Where will the $2 trillion come from? It will be borrowed.

So the current SS system is not in crisis and the President’s partial “privatization” proposal will significantly increase the national debt. So what gives? This is a case where ideology is driving policy.

Currently the Social Security administration staff administers the Social Security “Trust Fund”, investing the payroll tax revenues in U. S. government debt and earning a rate of return typical of government securities. Whether the “private accounts”, invested by individuals, would earn a higher rate of return depends entirely upon the assumptions one relies upon in making comparisons or projections. There is certainty, however, that the managers of the investment funds approved by the government stand to gain much and that the “management” costs charged by the managers will be considerably higher that the administrative costs of Social Security.

Another certainty is that in the coming months we will all be inundated with arguments for or against this proposal or that proposal. Just remember, that when it comes to this type of debate there will be a plethora of lies, damned lies, and statistics proffered from all sides.