President Bush is determined to grab the so-called "third rail" of American politics: Social Security Reform. Americans should see the decision for what it is: An ideological fork in the road, not a fiscal fix.
Social Security transfers money from one generation of workers to another. Younger workers contribute payroll taxes—6.2 percent of wages, an amount matched by employers—which then supports retirees
Social Security is an insurance policy. Workers pay premiums throughout their working lives. When they retire, they receive a minimum guaranteed income.
All arguments over Social Security begin with demographics. If the amount collected from workers always matched what was paid out to retirees, the debate would be over. But birth rates, life expectancy, immigration policy, wars and disease affect the population of each age group.
Because of the Baby Boom, the number of workers contributing to the system is greater than the number of retirees taking benefits out of it. So, revenue surpluses have accumulated that the Social Security Administration has been investing in U.S. Treasury securities—a big $1.5 trillion trust fund for the future. The bonds earn interest, which is reinvested.
Buying securities now guarantees revenue to the system when the demographic balance starts to tip the other way and the amount due to retirees is greater than the money collected from workers. The SSA will begin to draw down the securities trust fund in 2018.
The trust fund will cover any shortfall from 2018 until 2042. After that, the system is projected to cover just 73 percent of the benefits. So, in 2042, if wages, life expectancy, immigration and other variables continue on their expected path, Social Security may have a problem that might require decreasing benefits, increasing taxes, or both.
President Bush has taken higher payroll taxes off the table. His solution is to allow workers to divert up to $1,000 a year into private accounts. The argument is that those accounts would earn so much more money—a projected return of 4.9 percent versus the current 3.5 percent—that the savings would fill the budget gap.
The argument is just plain wrong. To compensate for the diversion of funds—money that would otherwise go to retirees—the government would have to borrow close to $2 trillion. The borrowing costs would quickly eat up any potential gains in private accounts.
So, what's the point? None, from a fiscal point of view. The real point for President Bush is to be able to say government is getting smaller and out of our hair.
The irony is the government will have to borrow trillions. That's bigger government, not smaller.
