Commentary

Response to Comments from Sen. Jon Corzine on the Senate Floor

By Andrew G. Biggs
This article appeared on Cato.org May 23, 2002.

In a statement on the Senate floor Tuesday, Senator Jon Corzine (D-NJ) took aim at a Cato Institute analysis of his April 28 weekly Democratic radio address concerning Social Security reform. In that address, Sen. Corzine claimed that proposals from the President’s Commission to Strengthen Social Security entail “drastic reductions in future Social Security benefits” of up to 45 percent. Cato’s response showed a number of Sen. Corzine’s statements to be false or deceptive.

The original Cato analysis is available at www.socialsecurity.org/dailys/05-06-02.html. Sen. Corzine’s May 21 response to the Cato Institute analysis can be found at www.senate.gov/~corzine/press/2002/05/2002521557.html. The text of Corzine’s radio address is available at www.senate.gov/~corzine/press/2002/04/2002515629.html. Detailed analysis of the Commission’s three proposals by Social Security’s independent actuaries can be found in the Commission’s final report, available at www.csss.gov. (Sen. Corzine’s statements generally refer to the Commission’s “Plan 2”).

The following responds to further claims made by Sen. Corzine on May 21. Many of Sen. Corzine’s claims are mistaken and do not promote an informed debate regarding the future of Social Security. Personal account opponents should put forward their own Social Security proposals, to provide the public an honest comparison of the costs and benefits of opponents’ proposals versus those of personal account-based plans.

Corzine claim: “It is indisputable that the Bush Social Security Commission’s privatization proposals include drastic cuts in guaranteed Social Security benefits.” Corzine even claims that Cato acknowledges this: “Cato: Ok, the Bush Commission is cutting benefits…”

Fact: Corzine’s claim that proposals from the President’s Commission drastically cut guaranteed benefits is based on a wholly false comparison. In a true apples-to-oranges comparison, Corzine counts the benefits the current program promises but not the increased taxes required to pay them, while for reform proposals Corzine counts the taxes needed to fund personal accounts but not the benefits accounts would pay.

Background: Social Security will become insolvent in 2041; by law, it must then cut benefits by 25 percent, with larger cuts to follow. There is simply no plausible interpretation of current law under which the benefits Corzine claims are “guaranteed” can be paid past 2041. In an almost comical redefinition of the word “guarantee,” Corzine claims that Social Security guarantees benefits that, by law, it simply cannot pay.

Corzine asserts that Social Security’s non-partisan actuaries confirm his charge of benefit cuts. In fact, the actuaries’ analysis of the commission plans shows nothing of the kind. (See p. 75 of the actuarial memo.) To illustrate: a 25-year-old low-wage woman retiring in 2042 is “promised” $896 per month (in $2001) from Social Security. However, because Social Security will be insolvent in 2042, by law the program can pay her only $655 per month (with larger cuts in future years). Under the Commission’s proposal, this same woman could expect to receive $611 in benefits from the traditional system plus $375 from her account, for a total of $986 per month. Her benefits would be $331 per month more than Social Security will by law be able to pay, and $90 more than Social Security even promises. This is what Sen. Corzine considers a “deep cut” in benefits.

True, higher earners would not see increases relative to the current system’s promises. For instance, an average-wage woman retiring in 2042 could expect 94 percent of what the current program promises, but cannot pay. However, her monthly benefits would still be 29 percent higher than what Social Security will, by law, be able to pay her.

Corzine claim: Commission personal account proposals “would force millions of Americans to delay their retirement.”

Sen. Corzine’s statement that proposals from the President’s Commission would “force millions of Americans to delay their retirement” is undeniably false. None of the Commission’s three reform plans alter Social Security’s retirement age. Individuals could still retire at any age past 62 and no one would be forced to work longer.

In fact, since Commission personal account proposals would pay higher benefits than the current program, personal accounts could enable workers to retire earlier than under current law. For instance, under the current program the 25-year-old low-wage woman cited above would have to work past age 70 to receive the same benefits that she could receive at age 65 under the Commission’s Plan 2.

Corzine claim: Cato’s analysis “may create the impression that those who retire in the next seven years are protected from benefit cuts. However, that is not the case.”

Fact: Corzine’s claim that current and near-retirees could see benefit cuts under Commission proposals is simply incorrect. It is not Cato that creates the impression that current and near-retirees would see no changes to their benefits; it is Social Security’s own actuaries who confirm that fact. Under all Commission plans, voluntary personal accounts are limited to workers aged 55 and younger. Individuals above age 55 would continue under the traditional program, receiving every penny that Social Security has promised. Maintenance of promised benefits to current and near-retirees is one of President Bush’s principles of reform, and Social Security’s independent actuaries confirm that Commission proposals live up to that principle.

Corzine also claims that the general revenue transfers to Social Security entailed as part of the Commission’s reform proposals might not be made, thereby forcing benefit cuts for today’s retirees. However:

  • General revenue transfers are integral to the Commission’s proposals. One cannot dissect the plans to remove important components, then condemn the plan for not including them.
  • The Commission’s Plan 2 reduces the need for general revenues by 68 percent versus the current system, from $21.7 trillion (in $2001) dollars to just $6.9 trillion in Plan 2. Even at this reduced cost, Plan 2 would still pay the 25-year-old low-wage woman cited above higher benefits than the current system.
  • If pressures on general revenues are likely to cause benefit cuts, as Sen. Corzine claims, those cuts will be far larger if we do nothing than if we enact reform.

Corzine claim: Cato argues that, “that there is nothing wrong with using Social Security funds for other purposes because those other purposes are not part of the Social Security system, and should be accounted for separately.”

Fact: Precisely the opposite: Cato analysts have consistently argued that the persistent spending of Social Security surpluses on other government programs weakens the program, rendering the fund irrelevant in terms of actually paying benefits. (See, for instance, “Trust Fund Truths,” by Andrew G. Biggs.) While the fund’s bonds will be honored, to do so the government must either raise taxes or cut other spending. This defeats the very purpose of a trust fund.

In fact, the Cato analysis criticized Sen. Corzine’s inconsistency on the issue: Corzine claims that “raids” on Social Security surpluses by current budget deficits “will result in higher debt levels, higher interest costs and ultimately more pressure to cut Social Security benefits in the long-term.” Under Corzine’s logic, massive pressure to cut benefits must already exist, since both Democratic and Republican Congresses have consistently spent Social Security’s surpluses since the mid-1980s.

If today’s “raids” weaken Social Security, then two decades of consistent, bipartisan raids on the trust fund show that a better financing method is needed. Investing Social Security surpluses in personal accounts prevents the government from spending surpluses on non-Social Security purposes. For instance, if the 1983 reforms had established personal accounts investing only in S&P 500 index funds, today we would have an asset worth almost $1.6 trillion with which to pay benefits without raising taxes, not a $1.1 trillion trust fund debt that will demand tax increases and spending cuts to repay. It seems irresponsible to maintain a trust fund financing method that twenty years of experience shows merely subsidizes deficits elsewhere in the government. We must and will honor the trust fund’s bonds, but personal accounts provide a better vehicle for future Social Security savings.

Conclusion

Due to demographic pressures, Social Security faces a substantial gap between the benefits it has promised and the benefits it can actually afford to pay. A central purpose of reform is to bridge that benefit gap, to enable Social Security to pay what it has promised. Personal accounts can bridge the benefit gap less expensively than other approaches because of the higher returns accounts are able to earn. By comparing the benefits that reform proposals can actually pay to the benefits Social Security promises but cannot pay, Sen. Corzine ignores Social Security’s benefit gap. In effect, Corzine pretends that Social Security does not face insolvency and that it does not need reform. This is wishful thinking, at best.

If Sen. Corzine and other opponents of voluntary personal accounts wish to make honest comparisons between personal account plans and the current program, they must first specify how they would keep the current program solvent. Will they raise taxes? Reduce benefits? Increase the retirement age? Allow the government to invest in the stock market, risking political influence over the economy? Personal account opponents are noticeably reluctant to submit their Social Security proposals to the same rigorous, non-partisan actuarial analysis that is publicly available on the Commission’s proposals as well other personal account plans put forward in Congress.

Once account opponents make public their own reform plans, Americans can judge the costs and benefits of each. Supporters of personal accounts have little doubt that, when presented with the costs and benefits of both, the public will opt for reforms incorporating voluntary personal retirement accounts. This is based not only on personal accounts’ lower cost, but on the security, ownership and inheritability that individual wealth building offers. If Sen. Corzine and other account opponents believe otherwise, they should show no hesitation in putting their own reform plans on the table.

Andrew Biggs is a former Social Security analyst at the Cato Institute.