The opponents of Social Security reform are fond of citing the Congressional Budget Office report from last June that states that the Social Security trust fund will not run dry until 2052. However, their use of CBO documents is highly selective. For example, they never note that the same report says that the Social Security "trust funds are mainly accounting mechanisms and contain no economic resources."
Thus, it is not surprising that they have completely ignored the remarks that Douglas Holtz-Eakin, director of the CBO, recently delivered before Congress. In them, Holtz-Eakin addressed matters that opponents of reform would much rather not. It is instructive to juxtapose their arguments with his.
No Near-Term Crisis? The George Soros-funded Center on Budget and Policy Priorities states, "The Social Security trustees' report reaffirms that Social Security does not face a near-term crisis and can pay full benefits for the next 38 years but will eventually face a significant imbalance."
In the part of his testimony entitled "Alternative Perspectives on Social Security," Holtz-Eakin, offers a different take on the next 38 years:
By about 2020, Social Security will no longer be contributing any surpluses to the total budget, and after that, it will be drawing funds from the rest of the budget to make up the difference between the benefits promised and payable under current law and the system's revenues. Policymakers will have only three ways to make up for the declining Social Security surpluses and emerging Social Security deficits: reduce spending, raise taxes, or borrow more.
Holtz-Eakin understands that paying full Social Security benefits over the next 38 years will impose additional costs on the federal budget and, ultimately, the taxpayers. The CBPP does not seem to grasp this. Nor does Paul Krugman:
Today let's focus on one piece of [reform proponents'] scare tactics: the claim that Social Security faces an imminent crisis.
That claim is simply false. Yet much of the press has reported the falsehood as a fact. For example, The Washington Post recently described 2018, when benefit payments are projected to exceed payroll tax revenues, as a "day of reckoning."
Here's the truth: by law, Social Security has a budget independent of the rest of the U.S. government. That budget is currently running a surplus, thanks to an increase in the payroll tax two decades ago. As a result, Social Security has a large and growing trust fund.
When benefit payments start to exceed payroll tax revenues, Social Security will be able to draw on that trust fund. And the trust fund will last for a long time: until 2042, says the Social Security Administration; until 2052, says the Congressional Budget Office; quite possibly forever, say many economists, who point out that these projections assume that the economy will grow much more slowly in the future than it has in the past.
Holtz-Eakin, however, asks some important questions about the bonds in the trust fund: "To pay full benefits, the Social Security system will eventually have to redeem the government bonds held in its trust funds. But where will the Treasury find the money to pay for those bonds? Will policymakers cut back other spending in the budget? Will they raise taxes? Or will they borrow more?" Would that Krugman were honest and acknowledged such questions. Alas, the CBO appears to hold itself to higher standards than the New York Times op-ed page.
The Crisis Is Coming When? The CBPP argues that the day of reckoning is far off:
The Social Security actuaries project that in 2018, benefit payments will begin to exceed the combination of payroll tax revenues and the funds that Social Security receives from the taxation of a portion of the Social Security benefits received by higher-income beneficiaries. This is the least significant of the three dates because total Trust Fund income -- which also includes the interest earnings that the Social Security Trust Fund receives on the Treasury bonds it holds -- will continue to exceed benefit payments for a number of years after 2018....[the] most significant date is the year in which the Social Security Trust Fund reserves will be exhausted. After that, the only income to the Trust Fund will be payroll tax revenue and revenues from the partial taxation of Social Security benefits, and annual revenues will not be sufficient to pay full benefits. As noted, the trustees project this year to be 2042.
Actually, the key date is 2008, according to Holtz-Eakin:
Social Security will soon begin to create problems for the rest of the budget. Right now, Social Security surpluses are still growing and contributing increasing amounts to the rest of the budget. But...those surpluses will begin to shrink shortly after 2008, when the baby boomers start to become eligible for early retirement benefits. As the rest of the budget receives declining amounts of funding from Social Security, the government will face a period of increasing budgetary stringency.
Most reform opponents put the day of reckoning far off, either 2042 or 2052. Most reform proponents bring it closer, to 2018, when Social Security is projected to pay out more in benefits than it collects in taxes. Only a few have suggested that the first date of concern is a few years from now when the Social Security surplus begins to decline, thereby putting increased pressure on the federal budget. Holtz-Eakin is one of them.
Reform Will Have Disastrous Consequences? So says noted actuary and economist Molly Ivins: "The plan will cost around $2 trillion in 'transition costs' just to shift from the current system. You notice Bush didn't mention that in the State of the Union. That's $2 trillion we don't have, can't afford and will have to borrow, with horrid economic consequences, all quite apart from the fact that the plan won't work."
Holtz-Eakin sees things a bit differently:
One of the major achievements of reform could be to resolve uncertainty about the future of the program. Uncertainty is an economic cost in its most fundamental form, and in the current context, there is uncertainty about the future of Social Security, its configuration, and who will be affected. The sooner that uncertainty is resolved or reduced, the better served will be current and future beneficiaries, who must make various decisions about their retirement (from how much they should save to when they will be able to stop working).
Prefunding retirement benefits has the potential to increase the nation's capital stock, boost productivity, and raise GDP in the long run. However, prefunding requires some people to consume less or work more than they would otherwise during a transitional period.
In the section of his remarks titled "The Future of Social Security," he also notes that it is better to act sooner rather than later: "The sooner efforts are made to address the long-term imbalance in the federal budget -- and in Social Security in particular -- the less difficult the adjustments will be."
Perhaps it is best, at least for Mr. Holtz-Eakin, that the left has largely overlooked his comments. After Federal Reserve Chairman Alan Greenspan endorsed personal accounts, the side of the blogosphere that is nuttier than a Planter's factory launched a campaign to discredit him. However, now the cat is out of the bag. Mr. Holtz-Eakin, keep an eye on your email box.
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