The new attack on George W. Bush’s Social Security reform plan is really an old attack, but it's one we'll be hearing frequently between now and election day. At issue are the "transition costs" involved in allowing workers to invest about one-sixth of their Social Security payroll taxes -- two percentage points out of the 12.4 percent total--in personal retirement accounts like IRAs or 401(k)s.
Social Security Commissioner Kenneth Apfel recently argued that "the taxes that we all pay go to pay benefits to people. If we take that money and you keep it in your own individual account, then how are we paying for your grandma? That’s a real serious question." For his part, Vice President Gore talks up the "missing trillion" he claims the transition would cost over 10 years, saying it is "a fair question to ask where that [money] is going to come from." The answer is simple: Large Social Security surpluses make personal accounts affordable without cutting current benefits by a penny. These transition-cost scare tactics are little more than an attempt to derail a popular and needed reform proposal.
If all workers had a personal account in which they could invest one-sixth of what they currently pay in Social Security taxes, deposits to those accounts from 2000 to 2009 would total $988 billion, according to Social Security Administration data. If only workers under age 50 participated, approximately $800 billion would be invested. That’s a lot of money, but grandma will still get her full benefits because Social Security will run a surplus of $928 billion in cash and $1.2 trillion in interest on the trust fund during those 10 years, which easily covers the money diverted to personal accounts. Since Bush pledges to save all Social Security surpluses for Social Security, grandma has nothing to fear.
More important, investments in personal accounts aren’t a "cost," as if the money were wasted. Investing one-sixth of payroll taxes in a personal account will yield far higher retirement benefits than leaving that one-sixth in the current Social Security system, thanks to dramatically higher returns on private investment. The nonpartisan Congressional Research Service (CRS) found that a personal account returning the S&P 500 average could pay fully two-thirds of the typical worker's promised benefits. Even at the low Treasury bond rate an account could pay more than one-quarter of final benefits. This CRS analysis shows how personal accounts' higher returns can put Social Security’s troubled finances back on track.
But if payroll tax surpluses are diverted into personal retirement accounts, those surpluses can't go into the Social Security trust fund. Won’t this undermine Social Security? Only on paper, since the trust fund exists only on paper. Ordinarily, the government simply spends Social Security surpluses and gives the trust fund nontradable bonds in exchange. The Clinton administration's own fiscal year 2000 budget admits that these "special issue" 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. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’ s ability to pay benefits." Since the administration itself confesses that the fund can pay benefits "only in a bookkeeping sense," unless you plan to spend your retirement benefits "only in a bookkeeping sense," real economic assets like stocks and bonds are a much safer bet than the trust fund.
Unlike the trust fund, personal accounts don't create the illusion of saving while really spending. Saving more for the future means consuming less today, so no one should be surprised that the money directed into personal accounts can’t be used for tax cuts or new spending. But since the choice is between saving $1 trillion today or burdening our children and grandchildren with almost $22 trillion in tax increases or benefit cuts just to keep Social Security solvent, funding personal accounts is the best possible use of the budget surplus.
The public now knows that private investments pay far higher returns than Social Security, and government numbers show that personal accounts are affordable today and can help pay benefits in the future. Still, it's no surprise that personal account opponents are trying to scare grandma with threats of benefit cuts. When the facts are against you, scare tactics are the best chance you've got.