Special Report

Accounting for San Diego

The city's pension fund scandal parallels Social Security's condition.

By 6.10.05

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If you have paid much attention to the news these last few weeks, chances are good you are familiar with the San Diego pension fund scandal. If examined closely, this scandal offers important lessons for Social Security reform.

In May, San Diego District Attorney Bonnie Dumanis filed conflict of interest charges against one trustee and five former trustees of the San Diego City Employees Retirement System. The defendants, Ron Saathoff, Terri Webster, Cathy Lexin, Mary Vattimo, Sharon Wilkinson, and John Torres, are accused of designing and voting for a pension contract that greatly enhanced their own benefits. For example, Torres' monthly benefit increased from $386 to $4,016 and Saathoff's from $2,530 to $9,703. While they were stuffing their own pockets, the trustees voted twice, in 1996 and 2002, to expand retirement benefits for employees while at the same time allowing the City of San Diego to escape needed payments to the pension fund. As a result, the fund now faces a deficit of $1.4 billion.

Although the San Diego pension fund and Social Security are different in some ways, there are important parallels. Both systems are underfunded. The San Diego pension fund's $1.4 billion in underfunding rises to $2 billion if health-care costs are included. Social Security is underfunded over 75 years to the tune of $25.2 trillion in today's dollars.

In both cases the care of the program is entrusted not to the beneficiaries but to a third party, in the case of the San Diego pension fund a board of trustees, and in the case of Social Security, Congress. Such a system is ripe for abuse because the third party is spending other people's money, and we are never as careful with other people's money as we are with our own. With Social Security, Congress spends the annual Social Security surplus on many projects of dubious value -- witness the recent Highway Robbery Bill. It also uses the Social Security surplus to mask the true deficit of the federal budget, and then creates accounting gimmicks like the Social Security trust fund to fool the public into believing that its retirement money is being well cared for.

Finally, both systems are poster children for one of the prime benefits of personal accounts, that of ownership. Since an individual is far more likely to take good care of something when he owns it than when he does not, individual accounts would have gone a long way toward preventing the abuse of the San Diego pension fund and Social Security. Had a system of personal accounts been in place in San Diego, it would have been near impossible for the trustees to underfund it. Since the funds would have gone into the personal accounts, the city employees who owned the accounts would have noticed if the trustees were not putting enough money in them. Any attempt to short the city employees and the trustees would have been run out of town on a rail.

It is the same with Social Security. With personal accounts, Congress would not have used the surplus all these years for pork-barrel projects and masked it with accounting gimmicks. Instead, the surplus would have gone into the personal accounts. Had members of Congress even thought of touching the surplus, the voters would have sent them packing.

There are many advantages to the ownership that would be provided by adding personal accounts to Social Security; among them we can now add increased prevention of abuse and fraud. If personal accounts had been in place in San Diego, chances are the pension fund would not be in the mess it is in today. Similarly, Congress would not have squandered the Social Security surpluses all these years. All the more reason to reform Social Security now.

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About the Author

David Hogberg is a senior fellow at the National Center for Public Policy Research.  Follow David Hogberg on Twitter.