Political Hay

End the Embezzlement Now!

Republicans have one chance to save Social Security reform.

By 3.17.05

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By now the battle lines in the Social Security contest seem pretty well drawn. The Republicans keep putting things on the table -- giving ground inch by inch -- while the Democrats refuse even to discuss the matter.

Clearly the Democrats have opted for a scorched earth strategy. Their bet is they can stonewall and make Bush look like a failure. So far it's working. If the President promises to do something about what he calls a national crisis and doesn't deliver, then it's his problem.

There is a way to turn the tables, however. The ugly truth is this. One of the major reasons the problems created by Social Security are invisible to the public is that Congress has been embezzling the so-called "Trust Fund" for the past 37 years. Yes, "embezzling" is the only word. (See my longer story on "The Right Idea," at www.taemag.org.)

In 1968, Lyndon Johnson decided to hide the costs of the Vietnam War and the Great Society by combining the federal budget and the Social Security Trust. To that date they had been separate. This was a classic "co-mingling of funds" of the kind that sends people like Bernie Ebbers and Ken Lay to prison.

Instead of investing the money in an arm's-length transaction, the President and Congress started pooling the two funds so the Social Security surplus could reduce the federal deficit. That has masked the crisis that Bush is now trying to get us to face. Every year, Congress spends $120-$150 billion from the Social Security Fund on federal programs. There is nothing collateralizing these loans except a bunch of IOU's in a bank down in West Virginia -- special bonds that are not marketable and pay only about 1 percent interest.

The "Social Security Crisis" will occur when, because of demographic shifts, this annual surplus vanishes over the next twelve years. Suddenly, Congress will no longer have that $100 billion to plug the budget gap every year. Next it will start having to pay back the IOU's. Quick as a wink, that $100 billion annual surplus will turn into a $200 billion-and-beyond annual shortfall. That's when the federal budget starts to melt down. It's inevitable when you open up the safe and find the CEO and board of directors have been tapping the till all along.

So here's the thing to do. The Republicans should walk into Congress next week and place a resolution on the table: "Stop the embezzlement now!" The Social Security Trust should immediately be put back in a separate account and invested in arm's-length transactions. As Robert C. Pozen, chairman of MFS Investment Management, suggested in the Wall Street Journal on Tuesday, this would give the Social Security Trustees a legitimate pot of money to begin paying the "transition costs" for dealing with the underlying crisis -- the adverse demographics that will make Social Security insolvent down the line.

Would it be painful? It certainly would. But that's the whole point. Recovering from embezzlement is never easy. But it will bring the problem to the fore and end the Democrats' gambit of "there's-no-problem, we-don't-have-to-do-anything, we-can-just-ignore-it."

It might even make private Social Security accounts start looking like a sensible solution as well.

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About the Author
William Tucker is news editor for RealClearEnergy.org.