Posted on 01/07/2005 9:36:35 AM PST by hinterlander
Contrary to conventional thinking, allowing workers to invest a portion of their Social Security taxes through personal retirement accounts will incur no net cost to the federal government.
The misconception that there will be new costs--i.e., "transition costs"--arises from forgetting that Social Security is already, in effect, debt-financed. Consequently: 1) Any debt sold to the public in the short term during the so-called "transition period" to pay all promised Social Security benefits simply refinances an existing liability; and 2) Refinancing Social Security's debt through personal accounts makes possible a reduction, and eventually an elimination, of Social Security's unfunded liability, which otherwise is scheduled to grow without bound.
Mountain Of Debt
In Social Security, the current generation of workers pre-funds its retirement benefits by making contributions to the program in the form of a tax taken out of every paycheck. In exchange for this tax, the government promises to pay the taxpayer, when he retires, precisely defined benefits, which are specified in law by formula.
The amount of money paid in payroll taxes would be more than adequate to pre-fund workers' retirement benefits were it properly invested, but it is not. In effect, the federal government borrows the payroll tax payments of current workers to pay the retirement benefits to current retirees. But unlike ordinary government debt, the debt obligation owed to workers through Social Security is not quantified and memorialized by the issuance of bond, note, or bill certificates to the workers. Nor is it formally recorded as debt on the balance sheet of the U.S. government. It is real debt nonetheless.
What pundits have labeled the "transition cost," is really the short-term cash-flow crunch that will happen when workers are allowed to invest a part of their Social Security taxes in personal retirement accounts rather than loan that money to the government to pay the benefits of current retirees.
Cash Flow
This cash-flow problem, however, does not arise because personal accounts create new (i.e., "transition") costs. To the contrary, the cash-flow problem arises because the government would be borrowing less. Every dollar of a worker's Social Security payroll tax contribution invested in a personal retirement account is a dollar less debt the government owes to the worker and would otherwise have to pay back in the form of future Social Security benefits.
Congress has a choice of how to manage this temporary cash-flow shortage. It can refinance the old (undocumented) debt obligation to Social Security beneficiaries through some new formal debt instrument, i.e., federal bonds. It can forgo refinancing this debt and actually reduce the country's current indebtedness by cutting planned future federal spending and use the freed-up revenue to repay the debt to former workers in the form of Social Security benefits. Or it can increase taxes to raise the required cash.
Economically, the most rational solution would be to require Social Security personal-retirement-account holders to lend the federal government whatever funds are needed to pay current Social Security benefits that otherwise would have been covered by the personal-retirement-account holder's payroll taxes. In exchange, the federal government would deposit into the taxpayer's personal-retirement-account Treasury-Inflation-Protected Securities (TIPS), interest-bearing long-term federal bonds backed by the full faith and credit of the United States with no restrictions on the right of the account holder to resell the bonds in secondary bond markets.
Refinancing the Social Security liability in this way would not cause a short-term shock to the bond market, and would not create immediate upward pressure on interest rates, because the government would not be entering credit markets to raise new cash. It would simply issue new bonds. Nor does this approach pose a long-term threat to financial markets since the bond market is already fully aware of the unfunded Social Security liability. The future financial obligation represented by the Social Security liability is already reflected in the current price of federal bonds.
Since new bonds issued to personal retirement accounts would simply refinance an already existing liability, no net increase in federal indebtedness results. There are no "transition costs" involved.
PERSONAL RETIREMENT ACCOUNTS PAY FOR THEMSELVES
Federal Debt Under Current Social Security Law v. Ryan/Sununu Assuming No Revenue Capture
Not only would refinancing the Social Security liability through personal retirement accounts not entail new debt, it would make it possible to pay off that debt and leave Social Security financially sound in perpetuity. The chart above illustrates this fact.
The red line represents the total new debt (as a share of GDP) that will be incurred under current law if there are no benefit cuts or tax increases. The green line depicts the amount of borrowing relative to GDP required to capitalize "large" personal retirement accounts (i.e., about half of all Social Security payroll tax contributions) without cutting Social Security benefits, raising taxes or increasing the retirement age, if Congress imposes only modest spending restraint.
The amount of spending restraint shown in the chart is based on the spending-control mechanism proposed in the legislation introduced by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.), which is designed to reduce the growth rate of federal spending one percentage point a year below CBO's baseline for eight years--i.e., 3.6% a year vs. 4.6% projected on average. This would lower total federal spending as a share of GDP in the coming decade from CBO's projected 20% to about 18.4%--the historic average for federal revenues during the past 40 years and exactly what CBO projects federal revenues would be in the future if all of the Bush tax cuts were made permanent and the AMT were reformed. The chart conservatively--and unrealistically--also assumes no positive dynamic revenue feedback effect from creating the accounts.
The area between the two lines to the left of their intersection--usually mistakenly characterized as "transition costs"--is significantly smaller than the "do-nothing costs" represented by the area to the right of the intersection, which increases without bound beyond 2037. Thus, the debt incurred to refinance the Social Security liability (which reaches a maximum of 29% of GDP in 2032) and alleviate the cash crunch when workers are allowed to invest their Social Security payroll tax contributions--so-called "transition costs"--not only isn't new debt, it is more than offset in later years when personal accounts reduce and eventually eliminate the Social Security liability altogether.
'National Blessing'
President Bush and Congress have a golden opportunity to modernize Social Security and make it solvent in perpetuity through personal retirement accounts. They should start by allowing workers to place about half of their Social Security payroll tax contributions into personal retirement accounts. Then, rather than panic over fictitious "transition costs," they should alleviate as much of the cash crunch as they can by restraining federal spending growth and enacting tax reforms to spur faster economic growth and generate as large a dynamic revenue feedback effect as possible.
After that, there is no need to worry about the rest. Congress should simply borrow money from workers' personal accounts to pay all promised Social Security benefits (going outside the accounts to credit markets only if necessary) and in exchange for the funds borrowed issue the accounts new long-term, inflation-protected bonds (TIPS) with no restrictions on resale in the secondary bond market. To paraphrase Alexander Hamilton, that debt would be to us a "national blessing."
they gotta do something...
my parents will be retiring here soon so I would hope they will get at least something they have paid into all their working lives....
I would also like a bit of the golden pot too especially since it appears that the people of my generation will be paying into it for the next 40 years....
I kind of take a little umbridge at the statement that SS is dept financed. It wouldn't have been if the DEM'S had kept their hands off of it. They are the ones that raided it and made it what it is today.
No one rational would put off that plumbing bill even if it meant paying now. The dems figure the kids can pay for the pipes, drywall, framing and water to keep the retirees happy now.
that and when the program was set up, the math was flawed. They expected the population to continue to explode like it had in the late 40s and 50s...since it didnt, there isnt as much going into the system....
Not a fun situation....
Interesting article.
If you would like to be added to this ping list let me know.
John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information: http://www.fairtax.org, http://www.salestax.org & http://www.geocities.com/cmcofer/ftax.html
Not to mention taxing the hell out of it should they so choose.
Of course. And oh my, how the lobbying dollars will flow. But that's probably the point anyway.
But..but Harry Reid SAID there were...
I agree with you, which is why the people of the United States should voluntarily give up SS benefits, insist the SS tax be repealed (scrapped) and invest their own money as they please. Lets try to get back to having a free country and following the Constitution.
There is no provision for SS in the Constitution. The states or the people could provide a retirement package, but not the federal government.
That, and they expected you to die before getting more than a few years of benefits.
Sure. Because the SS tax investments will be under your control, not theirs.
That's the point of "privatizing" -- getting the government out of it.
You are misrepresenting the program. Whether out of ignorance or willfully so, I don't say for sure.
Let me be clear: the individual will be making the investment decisions in the SS reform program, not the federal government.
How much will be invested in Halliburton? How much will Soros get his hands on?
Like everything else in Washington.. the investment of these funds will be politically motivated.
Before you get thrown off of your high horse, I suggest that you do some investigation. Do you know what a stock index fund is? Do you know what a bond index fund is? Do you know what government bonds are? And, finally, have you heard any - ANY - proponent of private accounts recommend that people be allowed to invest in individual stocks?
All of which begs the question: Do you have an IRA or 401-k? Or are you waiting to be totally reliant on Social Security?
Stop and think about it it isn't the president that comes up with all the pork. Some yes but as long as there is no line item veto, there is nothing he can do, if he wants part of a bill he has to take it all the bad and the F__up with the good.
They will have to figure a way that congress cannot get their sticky fingers in that money.
-- No, that isn't true. It was a ponzi scheme from the beginning to help finance the New Deal and later WWII.
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