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Borrowing to Help Fund Social Security Plan    •

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  Inventing a Crisis
  By Paul Krugman
  The New York Times

  Tuesday 07 December 2004

  Privatizing Social Security - replacing the current system, in whole or in part, with personal investment accounts - won't do anything to strengthen the system's finances. If anything, it will make things worse. Nonetheless, the politics of privatization depend crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it.

  I'll have a lot to say about all this when I return to my regular schedule in January. But right now it seems important to take a break from my break, and debunk the hype about a Social Security crisis.

  There's nothing strange or mysterious about how Social Security works: it's just a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline.

  Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire.

  The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem.

  But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

  Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come.

  It's true that the federal government as a whole faces a very large financial shortfall. That shortfall, however, has much more to do with tax cuts - cuts that Mr. Bush nonetheless insists on making permanent - than it does with Social Security.

  But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one.

  My favorite example of their three-card-monte logic goes like this: first, they insist that the Social Security system's current surplus and the trust fund it has been accumulating with that surplus are meaningless. Social Security, they say, isn't really an independent entity - it's just part of the federal government.

  If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice.

  But never mind: the same people who claim that Social Security isn't an independent entity when it runs surpluses also insist that late next decade, when the benefit payments start to exceed the payroll tax receipts, this will represent a crisis - you see, Social Security has its own dedicated financing, and therefore must stand on its own.

  There's no honest way anyone can hold both these positions, but very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success.

  For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it.

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  Borrowing to Help Fund Social Security Plan
  Reuters

  Monday 06 December 2004

  WASHINGTON - The White House said on Monday it would borrow money to help pay for adding personal retirement accounts to Social Security, after ruling out tax increases to finance a transition experts say could cost $1 trillion to $2 trillion over 10 years.

  President Bush has made reform of the U.S. retirement program a top priority for his second term, and he used a private meeting with congressional leaders on Monday to press for action next year. "Most members (of Congress) recognize that the system needs to be fixed," said White House spokesman Scott McClellan.

  Democrats at the meeting urged Bush to propose a more specific plan, aides said. Bush has only issued broad principles so far.

  The president's economic advisers have been analyzing financing options for more than a year. Until now, the White House has stopped short of saying that borrowing would be needed to cover the transition costs.

  Experts say Bush has few other options because of record federal budget deficits. Bush opposes raising taxes or making changes for those at or near retirement, the White House says.

  "There will be some upfront transition financing that will be needed to move toward a better system that will allow younger workers to invest a small portion of their own money into personal savings accounts," McClellan said.

  The transition costs will be between $1 trillion to $2 trillion, according to congressional and private-sector estimates. Asked if the costs would be financed by government borrowing, he added: "That's what you're looking at doing as part of the transition to a better Social Security system." He declined to say how much borrowing would be needed.

  Bush's economic advisers believe a short-term increase in borrowing is economically feasible, and that the cost of doing nothing would be far greater in the long run. While the nation's debt load would increase initially, it would fall as the reforms are phased in, advocates say.

  Democrats have vowed to protect Social Security from "privatization" by Bush and his Republican allies in the U.S. Congress. They warn that the nation's mounting debt could drive up interest rates and become a drag on economic growth.

  McClellan countered: "The Social Security system is unsustainable. It needs to be fixed." He said it would cost $10 trillion "if we do nothing... It will lead to either massive tax increases or massive benefit cuts for younger workers."

  Brian Riedl, a budget expert with the conservative Heritage Foundation, said the White House and Congress should minimize the amount of new borrowing by restraining federal spending.

  "Even a transition cost of $1.5 trillion over 15 years comes to $100 billion a year, and there's enough wasteful and outdated spending to cut $100 billion out of the annual budget," Riedl said.

  A recent analysis by the White House Council of Economic Advisers found that tapping the bond markets to pay for private accounts would increase the nation's debt-to-GDP ratio by 23.6 percentage points by 2036.

  Under this scenario, the debt held by the public would increase by as much as $4.7 trillion. But the new government bonds would be repaid 20 years later, eliminating Social Security's unfunded liability while reducing the tax burden in the long term, advocates said.

  "The president, at this point, has not endorsed a specific plan," McClellan said.

  But Republicans say the Bush administration favors a plan that would allow workers to voluntarily redirect 4 percent of their payroll taxes up to $1,000 annually to a personal account.

  The White House had once hoped that budget surpluses, projected in 2000 at $5.6 trillion over 10 years, would fund the transition period. But those surpluses have vanished.

  The federal budget deficit hit a record of $412 billion in the 2004 fiscal year that ended Sept. 30, and the Congressional Budget Office has projected $2.3 trillion in accumulated deficits over the next decade.

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  Jump to TO Features for Wednesday December 8, 2004   

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