Commentary

Room to GROW

By Deroy Murdock
This article originally appeared on National Review Online on July 20, 2005
President Bush still may wrangle a Social Security victory from the jaws of defeat.

While Democrats “just say no” to his voluntary personal retirement accounts, Republicans are making them an offer they may be unable to refuse: Help the GOP stop raiding the Social Security Trust Fund, or vote to continue Uncle Sam’s biggest swindle.

Sen. Jim DeMint (R., S.C.) and Rep. Paul Ryan (R., Wis.) lead this effort. They would create “Growing Real Ownership for Workers” accounts that would be voluntary, personally owned, and inheritable. While these GROW accounts would be smaller than those President Bush advocates (4 percentage points of each participant’s 12.4 percent employer/employee payroll tax), they would be financed by the Social Security surplus, namely taxes collected above and beyond the system’s benefit payments.

Americans may believe this money is conserved for the future. Sorry. It vanishes as quickly as Congress sees it. To understand how, try this experiment: Open your wallet. Remove $100. Buy a new T-shirt, some socks, a decent lunch, two movie tickets, and beers with a friend afterward. Now, place in your wallet a slip of paper that reads: “I owe me $100 when I retire.”

Social Security is financed similarly.

In fiscal year 2005, for instance, the Social Security system will collect $577.1 billion in payroll taxes, $16.6 billion in taxation of benefits, and $91.7 billion in congressionally appropriated interest. Of this $685.4 billion bundle, retirees will receive $511.6 in benefits, while $9.1 billion will cover administrative costs. This $164.7 billion balance is the Social Security surplus.

This money is not invested in stocks, real estate, or even Picassos. Since 1983, Congress has spent $1.67 trillion of this cash on food stamps, cruise missiles, the space shuttle, Amtrak, etc. In its place, non-traded “special issue Treasury notes” sit in the so-called Social Security Trust Fund, a filing cabinet in Parkersburg, West Virginia. These pieces of paper obligate future Congresses to collect taxes tomorrow to finance Congress’ bipartisan spendaholism today. There are no underlying, marketable assets involved — just the anticipated political will of future elected officials to shake down citizens who currently populate America’s K-12 classrooms.

This is legalized Enron accounting. DeMint, Ryan, and their co-sponsors would end this spectacular fraud and, as economist Steve Moore says, “place this money in 140 million individual lockboxes across the country.”

Once Americans under 55 who so wish deposit their shares of this money into their GROW accounts, Congress cannot use those funds simultaneously to mask its addiction to spendahol.

“Ever since I came to Congress, I have been fighting to stop the raid on the Social Security surplus,” Rep. Ryan stated June 22. “This puts us on a path to do just that.”

GROW accounts would ignore the portion of payroll taxes dedicated to today’s Social Security benefits. So, seniors can relax. Their checks will stay untouched.

While these accounts initially would contain marketable Treasury bonds, in 2008, participants could choose to diversify into stocks and index funds. The Social Security Administration assumes modest management expenses of 0.3 percent of account balances.

According to the SSA, a 44-year-old earning $36,600 would retire with an account worth $9,783 to $13,096, depending on his preference for bonds or diversified investments. A 34-year-old earning $58,600 would retire with $19,117 to $30,606. Come 2017, surplus payments would end, but this roughly $1.2 trillion in accumulated private property would keep growing. These nest eggs would help finance each owner’s retirement benefits.

Some free marketeers would sweeten the DeMint-Ryan plan by adding congressionally allocated interest to these accounts. They would make a huge difference through the magic of compounding.

Phil Kerpen, policy director of the Free Enterprise Fund in Washington, D.C., estimates that “adding interest nearly triples the ultimate size of these accounts.” In the examples cited above, the 44-year-old worker “would have an account of $26,929 in the bond fund and $35,597 in the mixed fund. Your 34 year old would have an account of $53,321 in the bond fund and $84,215 in the diversified portfolio.”

Kerpen adds that

In 2006, the first year of GROW accounts under this legislation, the total Social Security surplus will be $187.6 billion. The legislation as currently written, however, will include only the cash surplus in personal accounts, which is expected to be only $86.7 billion in 2006. This is a crucial distinction. Including the interest income dramatically would improve the plan by creating much larger accounts. It’s the difference between having very modest accounts that peak at only 1.8 percent of payroll and having full, 4 percent accounts for several years. For an average worker, it’s the difference between owning and controlling about $500 versus $1,200 a year.

Would adding interest boost the deficit and the national debt? Kerpen says, “No.”

“The interest already is scheduled to be paid to the Social Security Trust Fund,” he explains. “Paying that interest by issuing bonds to personal accounts simply means shifting some debt from the interagency column to the held-by-the-public column. If we take seriously the obligation to pay benefits to future retirees, then the debt in the Trust Fund is every bit as real as the debt held by the public.”

However you add it up, these accounts would generate real wealth for working Americans. Yet Democrats remain unsatisfied. Like a 21st-century Bonnie and Clyde, House Democratic leader Nancy Pelosi of California and Senate Democratic chief Harry Reid of Nevada seem comfortable with Congress’ annual Trust Fund heist.

“There’s nothing wrong with Social Security lending money with the prospect of returning it,” Pelosi told Congress Daily. Reid called DeMint-Ryan “a transparent political gimmick.”

Heritage Foundation research fellow David John observes, “Those evil sheriffs gunned down Bonnie and Clyde before they had a chance to pay back what they borrowed — with interest.”

President Bush should push to “stop the raid and start the accounts,” as this idea’s supporters chant. As for Bush’s opponents, “Democrats claim they only want to spend Social Security funds on Social Security,” Sen. DeMint said June 22. “We are about to find out if they are serious. Let’s see if the party of ‘No’ can say ‘no’ to stopping the raid on Social Security.”

New York commentator Deroy Murdock is a syndicated columnist with the Scripps Howard News Service and a member of the Advisory Board of the Cato Institute’s Project on Social Security Choice.