By David Hogberg on 6.24.04 @ 12:05AM
Opponents of Social Security reform think they have a new weapon.
The opponents of Social Security reform think they have a new
weapon. According to a new Congressional Budget Office report,
the Social Security trust fund has enough resources to pay benefits
until 2052, not 2042 as commonly reported by the Social Security
Trustees. Rep. Bob Matsui, the leading congressional hit man for
reform opponents is ecstatic. The report, he claims, shows "Social
Security is not in crisis and the financial challenges facing the
system are manageable."
If only it were so. The trust fund is one of the most misleading
concepts in the Social Security debate. Its existence allows
pundits like Paul Krugman to write that "current projections show
that under current rules, Social Security is good for at least 38
more years." Indeed, the trust fund is treated like some magical
entity that can be used to pay benefits after 2019 when the Social
Security system begins paying out more in benefits than it collects
in taxes. In other words, it's a free lunch. Now, it seems odd that
a Princeton economist believes that there is such a thing as a free
lunch, but then it's Krugman.
The truth is the trust fund has nothing more than government
bonds in it. Government bonds are only an obligation on future tax
revenue. In short, they have no economic value other than the
government's word that it will pay back the bonds. But don't take
my word for it. Read the introduction to that very same CBO report
that has reform opponents so giddy:
Social Security's finances are often discussed in terms
of the trust funds that are used in the federal budget to track
outlays and revenues over the life of the programs. Those trust
funds are mainly accounting mechanisms and contain no economic
resources. [Italics mine.]
Focusing exclusively on the trust fund begs the question who is
going to pay for all of the bonds in the trust fund starting in
2019? It overlooks the tremendous pressure paying those bonds will
put on the rest of the federal budget and, ultimately, the
taxpayer. It is also myopic: it says nothing about what happens
after the bonds run out, be it 2042 or 2052. Relying on the trust
fund to keep Social Security solvent is willfully to ignore the
long-term effect that paying off the trust fund will have on the
budget and our economy. It's like a captain who, seeing that a
storm has wrecked part of the deck of his ship, orders his crew to
take all of the wood from the hull to fix it.
In reality, the CBO report actually strengthens the case for
reforming Social Security with a system of personal accounts. If
the CBO is correct that the exhaustion date of the trust fund is
2052 and not 2042, then for practical purposes it means that the
amount of time the taxpayer is on the hook for paying off the bonds
in the trust fund has been extended by ten years.
Currently, Social Security runs a surplus which the federal
government "borrows" in exchange for putting bonds in the trust
fund. Reform would stop this practice because the Social Security
surplus would be diverted to the personal accounts. This would
reduce the amount of time that taxpayers would have to pay for the
trust fund.
A closer look at the CBO report reveals even more support for
reform. There are two basic reasons why the CBO has a later date
for the trust fund exhaustion than do the Trustees. First, the CBO
report assumes higher levels of productivity growth than the
Trustees, resulting in lower projected deficits. The CBO also makes
a different assumption about taxable payroll versus fringe
benefits:
Historically, nontaxable fringe benefits have made up a
growing share of compensation and wages a declining share.
Consequently, taxable payroll has shrunk as a percentage of GDP.
Both CBO and the Social Security trustees assume that the trend
will continue, but the trustees estimate that it will occur at a
faster pace. Thus, they project that taxable payroll will be a
smaller share of GDP than CBO projects.
Granted, these are assumptions made about projections of the
future and should be taken with a grain of salt. Yet reform
opponents can't have it both ways. If they accept that the trust
fund is good until 2052, then they have to accept the assumptions
that get them there, namely higher productivity and larger payroll.
Higher productivity and larger payroll mean that there would be
even more money to put into personal accounts, resulting in even
more retirement benefits for workers.
What the reform opponents' reaction to the CBO report reveals is
that they still propagate the fiction that the Social Security
trust fund is an asset. And reading most newspaper articles about
it shows that the press continues to play along. Any honest
discussion of Social Security needs to acknowledge what the trust
fund really is, a future liability for taxpayers.
topics:
Taxes, Federal Budget, Social Security
