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.
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