It’s come up in both U.S. Senate debates and in lots of other press coverage of the campaign to replace the outgoing Jesse Helms. Social Security’s future is one of the most important issues that any candidate can discuss, but based on the quality of the discussion so far, by candidates and by the news media, I think North Carolinians have a right to be confused about it.
Democrat Erskine Bowles says that Republican Elizabeth Dole’s proposal to offer private investment options within the Social Security system would threaten the system’s solvency. “It’s a matter of simple arithmetic,” he said at Saturday night’s debate at East Carolina. If the government diverts payroll taxes from the trust fund to private accounts, it will cost $1 trillion in transition cost that will necessarily reduce benefits.
Dole has defended herself in the past simply by promising not to touch the benefits of current beneficiaries. Only in this last debate did she start to explain the more important, and more complicated, issue of unfunded liability. Simply put, the Social Security system has already promised around $6 trillion to $8 trillion in benefits over the next few decades that cannot be paid with projected payroll taxes. Any transition costs incurred as we move to a new, investment-based system would merely bring unfunded liabilities onto the books, not create new ones.
Unfortunately, Dole’s point hasn’t gotten enough attention during the campaign, nor have our media organizations done a good job of delving into the finances about the system. In a recent editorial, for example (see http://www.charlotte.com/mld/observer/2002/10/16/news/4294493.htm), The Charlotte Observer suggested that while Dole’s ideas deserved consideration, Bowles was right to deny any immediate crisis in the system, since the Social Security trust fund exists and will fund operating deficits until 2041. This is a gross misunderstanding of how the system works. The Social Security trust fund contains only non-negotiable Treasury bonds that the government has issued to itself. Its credit is good — that’s not the point. If your credit was excellent, but you wrote yourself a check for $100, it wouldn’t increase your net worth by $100. The deposited check would be offset by a debit. The Social Security trust fund has an equivalent impact on the finances of the system: None.
With the trust fund, the federal government beginning in around 2017 will have to redeem the bonds and thus fund Social Security’s operating deficit by either raising payroll taxes, reducing expenditures, or expanding the national debt (which is merely a way of hiking taxes or reducing spending more gradually). Without the trust fund, the federal government in around 2017 will have to raise payroll taxes, reduce spending, or expand the national debt. Same difference.
When Bowles says that he wants to “save” the Social Security surplus to be used later on, he actually means that he wants to pay down the national debt in preparation for the tax hikes, benefit cuts, or new borrowing needed in 2017 and afterward. Since the current debt is relatively small by historical standards (measured correctly, as a share of GDP), is used by the Federal Reserve to conduct monetary policy and by private investors to measure investment risk, and consists of relatively low-rate bonds, this is not a wise economic decision. When he was in the Clinton administration, Bowles understood this. The administration proposed that the federal government invest the Social Security surplus directly into equities. A bad idea because it would get Washington involved in owning, and eventually controlling, corporate businesses, the proposal was at least a serious attempt to address a serious problem.
Bowles’ obfuscation of the real issues in Social Security reform is being aided by incomplete or faulty reporting by the media. Private accounts would certainty represent a major departure from the current approach and deserve thoughtful debate — not scare tactics and “simple arithmetic” that turns out to be nothing more than Enron-like accounting.