June 24, 2005
By David C. John
For 22 years,
Congress has used surplus tax revenues going into Social Security
to hide the real level of federal spending. Instead of saving this
money to pay future benefits-as was intended-Congress used it to
disguise the extent of annual budget deficits. Sen. Jim DeMint
(R-SC) and Rep. Jim McCrery (R-LA) have created legislation that
would save Social Security's surplus and use it to improve
Americans' retirement security. Their plan, which is supported by a
growing number of legislators, would use Social Security taxes that
are not needed to pay benefits today to establish individual
accounts that taxpayers would own and could use to finance part of
their retirement security. In its first year alone, the
DeMint/McCrery proposal would force Congress to return about $80
billion to payroll taxpayers.
worrying about whether a future Congress will honor promises to pay
a certain level of retirement benefits, workers would have the
security of owning an account that is invested in safe, secure
government bonds. Instead of having Congress squander part of
workers' Social Security taxes on wasteful spending projects, they
would know that their money was being used for what it was always
intended for-their retirement security.
Hiding the Real
Since 1983, when
it first began to collect more Social Security taxes than it needed
to pay benefits, Congress has told the American people that the
extra money is invested to help pay for the impending retirement of
millions of baby boomers. The reality is very different. The excess
taxes were really given to the federal government to spend on
whatever it wished.
In return, the
Social Security trust fund received a special issue bond that is
nothing more than an IOU that will be repaid from still more taxes
collected from our children and grandchildren. In reality, the
United States is no more prepared for the retirement of the baby
boomers than it would have been if the trust fund never existed.
Congress will only be able to pay their benefits if it raises
taxes, borrows heavily, cuts other spending, or reduces Social
To make matters
worse, the money siphoned from the Social Security trust fund has
been used to hide the real level of deficit spending. A dollar
borrowed from the Social Security trust fund is a dollar that
Congress will not have to borrow from the financial markets. As a
result, if Congress borrows $50 billion from the Social Security
trust fund, then $250 billion worth of overspending can be reported
as only a $200 billion annual deficit.
Putting an End To
allowing Congress to quietly borrow the Social Security surplus,
the DeMint plan gives it to workers in the form of accounts that
are invested in regular issue government bonds. This means that if
Congress wants to spend at the same level that it does now, it will
have to borrow the money to finance it openly in the financial
markets. Instead of overspending by $450 billion and hiding $80
billion of that spending by borrowing the Social Security surplus
and reporting a deficit of only $370 billion, Congress will have to
report the real deficit of $450 billion.
have known about Congress's accounting trick for years, and they
use the real deficit in their economic forecasts and interest rate
projections. However, normal Americans have not been party to this
trick. The DeMint plan will let them know the real level of deficit
borrowing will appear to increase the deficit, but in fact, neither
the amount of spending nor the amount of borrowing will change. The
increased deficit number will be the result of honest reporting and
the end of the budget gimmickry used since 1983.
Under the DeMint
plan, the Social Security surplus will be returned to workers in
the form of a Social Security Personal Retirement Account (PRA)
that is invested in regular-issue government bonds. While the House
and Senate approaches are slightly different, both would direct the
surplus into accounts that are patterned after those in the Thrift
Savings Plan (TSP) that is used to finance part of federal
employees' retirement benefits today.
Security Administration estimates that between now and 2017, when
the Social Security surplus comes to an end, workers would receive
about $5,500 each in their accounts. At that point, no further
money would go into the accounts, but they would continue to grow
because of the interest paid on them.
retire, their benefits would be paid by a combination of a
government check like that used to pay today's retirees and money
from their PRAs. While PRAs would be voluntary, and a worker could
choose not to have one if he or she wished, owning an account would
not reduce a worker's overall level of Social Security
At some point in
the future, workers might have access to additional investment
choices, such as a lifespan account that would be invested in a
mixture of stock index funds and corporate bonds. They could choose
to either keep their accounts invested in government bonds or move
their money to another type of investment.
A First Step
While the DeMint
plan is a step in the right direction, it does not fix Social
Security. The program will still begin to run deficits in 2017, and
those deficits will still reach over $100 billion a year (in
today's dollars without inflation) within five years of 2017. A
worker born in the 1980s will still face a future in which Social
Security can afford to pay only about 70 cents for every dollar
that he or she has been promised in benefits.
needs to bring Social Security's benefit promises closer to what it
can afford to pay through mechanisms such as progressive indexation
and changing the retirement age. It also still needs to establish
permanent Personal Retirement Accounts (PRAs) within Social
Security. Permanent accounts would give younger workers the
opportunity to improve their Social Security benefits significantly
and build nest eggs that can be left to their families.
The cost of fixing
Social Security is still climbing at about $50 billion a month, and
so additional delay will only cost our children and grandchildren
more money. Congress should not wait.
weakens Social Security by draining billions of dollars.
False. The DeMint plan uses only money that Social Security does
not currently need to pay benefits. Both the House and Senate
approaches ensure that the Social Security trust fund has the same
level of resources available in the future as it would under
increases the deficit. False. Both spending and borrowing
would remain the same. The only change is that the DeMint plan
forces Congress to report the actual level of its deficit spending
instead of concealing part of it.
requires huge and perpetual debt increases. False. The plan
does create new debt because the Social Security surplus that is
returned to taxpayers would be invested in Treasury bonds. The
total amount of new debt would be relatively small, and it would
only be created during the period ending in 2017, while the Social
Security surplus exists. Because the bonds in the accounts will pay
a portion of account owners' retirement benefits, this new debt
will lower the cost to the Treasury of paying those benefits. Of
course, the alternative to this new debt is for Congress to
continue to spend the Social Security surplus and to use it to hide
the real level of deficit spending.
establishes a huge federal agency to manage the account that will
cost billions and employ thousands of new workers. False.
Personal accounts will be managed mainly by existing methods. The
Social Security Administration estimates that administrative costs
will amount to about 0.3 percent of account balances annually. SSA
already issues an annual statement to workers that can be easily
and inexpensively expanded to show their account balances, and most
tasks can be handled by existing government workers or contracted
David C. John is
Research Fellow in Social Security and Financial Institutions in
the Thomas A. Roe Institute for Economic Policy Studies at The
A good first step to promote fiscal honesty and ownership.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
Read More >>
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