Commentary

Voters Deserve the Truth on Social Security

By Andrew G. Biggs
November 2, 2000
In a presidential race this close, a little bit of exaggeration is to be expected. But the latest Social Security attack ads from Vice President Gore and the Democratic Party cross the line from “fuzzy math” to outright falsehoods.

A current Democratic National Committee television ad says George W. Bush is “promising to take a trillion dollars out of Social Security so younger workers can invest in private accounts. The problem is, Bush has promised the same money to pay seniors their current benefits.” Recorded phone calls by actor Ed Asner claim that personal accounts would mean benefit cuts for today’s seniors. And Gore himself talks up the “missing trillion” he claims personal accounts would cost over ten years, saying it is “a fair question to ask where that $1 trillion is going to come from.”

Wrong on all counts. Multitrillion-dollar Social Security surpluses mean we can build personal accounts for the future without cutting today’s benefits by a penny. The Gore campaign surely knows this, but the temptation to demagoguery must be too great.

George W. Bush promises to let younger workers invest part of their Social Security payroll taxes — about 2 percentage points out of the 12.4 percent total — in accounts similar to IRAs or 401(k)s. The accounts would be optional, but since opinion polls show more than two-thirds of younger Americans wanting personal accounts, let’s assume that every worker under the age of 50 took part. In that case, these accounts would invest somewhere around $850 billion in stock mutual funds and corporate bonds over the next 10 years. (It’s only if all workers at all ages participate that we get near the $1 trillion figure the Democratic ads cite.)

It’s this money the DNC ads claim is promised to existing retirees. If that money goes to personal accounts, the ads say, today’s Social Security benefits must be cut. But this claim is false. The reason is that Social Security is slated to run large surpluses — some $928 billion in cash and another $1.2 trillion in interest on the trust fund from 2000-2009. So even if every eligible worker opted for Bush’s personal accounts, Social Security could pay every penny of benefits to current retirees and still run a 10-year surplus of over $1 trillion.

But what about the long run? Even if personal accounts are affordable today, don’t they drain money from the trust fund that will eventually be needed to pay benefits? Vice President Gore makes this charge, but nothing could be further from the truth. For one thing, deposits to personal accounts don’t take money out of the system, since the accounts could only be used to pay Social Security benefits. And personal account investments would earn a far higher rate of return than the “special” non-negotiable government bonds in the trust fund. Government bonds have averaged just 0.5 percent interest after inflation throughout the post-war period. Compare this to the 7 percent average return from stocks and the advantages of market investment are obvious.

But this rate of return difference isn’t even the most important thing. Because in a very real way, money placed in the trust fund isn’t really saved at all. In the current system, payroll tax surpluses are simply spent and the trust fund is given an IOU to be repaid by raising taxes on future taxpayers. The Clinton administration itself admits that trust fund bonds are not “real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that … will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” By investing in real economic assets like stocks and corporate bonds, personal accounts would save today’s surpluses to pay future benefits — without raising taxes.

Contrary to what Vice President Gore says, personal accounts will save today ’s surpluses for Social Security without cutting benefits for current retirees. The Democrats’ latest senior-scaring scheme is little more than an attempt to derail a popular reform proposal in the closing moments of a presidential campaign. That’s understandable, given that the vice president’ s political career is at stake. But that doesn’t make it right.

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