August 31, 2001

August 31, 2001 | Commentary on Social Security

Missing the Point on Social Security

For every problem, there's at least one solution that is simple, easy to explain and completely wrong.

Take, for example, the suggestion made by the constituent of a congressman I once worked for. He proposed solving the deficit problem by printing more money. Several countries actually have tried this, and in every case the resulting inflation nearly destroyed their economy. Yet "solutions" like this keep appearing on a variety of complex issues.

In the case of Social Security, the prize-winning "solution" comes from Rep. Martin Sabo, D-Minn. Sabo thinks the way to solve the program's looming financial problems is to have the government pay a higher interest rate on the special bonds in the Social Security trust fund.

Instead of paying today's 4.5 percent interest after inflation -- the level paid on regular federal bonds -- Sabo wants to pay 6 percent after inflation. If that's done, he says, Social Security's problems will vanish.

Sabo likes the idea of paying more interest to the trust funds so much that he has introduced a bill to do just that. The fact that these bonds are IOUs -- mere paper promises to pay back money the government borrowed from the trust funds -- and have no other value seems to have escaped his notice.

Or has it? Usually, people who suggest these simplistic solutions have the charm of having no idea what they are talking about. But this doesn't apply to Sabo, a former chairman of the House Budget Committee. He knows the facts about Social Security as well as anyone on Capitol Hill. He also knows the so-called Social Security "trust fund" bears little resemblance to trust funds in the real world (i.e., the world outside of Washington).            

Ordinarily, a trust fund is something filled with high-grade stocks and bonds that are carefully managed to produce income. That's not the case with Social Security. Every extra dime that goes into the program is automatically spent on other government programs.

Its trust fund is filled with nothing but promises to use other tax money to pay benefits once the baby boomers' retirement forces the system to start paying out more in benefits than it's earning in taxes. They are IOUs, pure and simple.            

Starting in 2016, the Treasury is going to have to retire these IOUs by giving Social Security money from other taxes. By 2021, those payments will reach over $100 billion a year (in today's dollars without inflation). By 2026, they will reach over $200 billion a year, and by 2031, they will pass $300 billion annually. The yearly cost just keeps going up after that.

These annual payments mean there will be less money available for other programs dealing with such matters as education, health and defense. As the annual deficits rise, our children will have some truly nasty decisions to make. Would they rather pay for programs that benefit their kids or their parents?

So what good would it do to raise the interest rate on the IOUs? Oh, sure -- making the trust fund appear larger would buy some time. With a greater face value, the IOUs wouldn't run out in 2038, as they're scheduled to do now -- they'd last for years after that.

But our children and grandchildren would still face the same tough choices trying to come up with the money needed to pay them off. A problem deferred is hardly a problem solved.            

Besides, if Sabo's approach really worked, why stop at 6 percent? Why not raise the interest rate on the trust fund IOUs to 10 percent? Heck, why not raise them to 30 percent and allow all Americans to retire rich? It would make just as much sense.

And if all else fails, start printing more money.

David John is a senior policy analyst for Social Security at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security

Distributed Nationally on the Knight-Ridder Tribune Wire