September 16, 2004
By Alison Acosta Fraser
In his acceptance speech at the Republican National Convention,
President Bush revived several initiatives from his first
presidential campaign. Not the least of them: a pledge to "fix"
Social Security by letting younger workers invest some of their
payroll taxes in personal retirement accounts.
Opponents of modernizing the Depression-era system quickly jumped
on the proposal as too costly. But such criticisms are penny wise
and pound foolish.
Trying to keep the ailing system going for another generation will
wind up costing taxpayers far, far more than making reforms today.
Demographic realities -- the increasing longevity of Americans and
the looming mass retirements of the baby boomers -- make it
impossible to maintain the current system indefinitely.
Fifty years ago, the ratio of workers to retirees was 16 to 1.
Those days are long gone. Today only 3.3 workers pay into the
system for every person drawing benefits. By the time today's new
workers are ready to retire, the ratio will have shrunk even
further, to just 2 to 1.
While President Bush would maintain the current benefit system for
those at or near retirement age, he wants to give younger workers
an option: to invest some of their payroll taxes into a personal
retirement account -- an account that will earn interest and belong
What makes this approach expensive is the need to continue paying
full benefits to those remaining completely in the current system
while younger workers send part of their money (that would
otherwise help pay current benefits) into personal accounts. In
other words, these so-called "transition costs" come from changing
the program's cash flow.
Admittedly, these reforms are costly. The Social Security
Administration has analyzed a number of Social Security plans
similar to that outlined by the president. Its estimates of
transition costs incurred by these plans run as high as $2 trillion
over the first 10 years, and from $7 trillion to $8 trillion total
before the transition is completed in mid-century.
Critics of personal accounts stress the transition costs while
ignoring the costs of not making the transition. Newsday columnist
Marie Coco dismissed the president's plan as "a jumbo mortgage,
taken out against the nation's future." The analogy is off because
that mortgage has already been taken out.
The latest report by the Social Security Trustees pegs the system's
unfunded obligation at $27 trillion, making transition costs pale
in comparison. Simply doing nothing and maintaining the status quo
will cost three to four times as much as transitioning to a
personal-account system that provides retirees will own, control
and can pass on to their heirs.
To argue that high transition costs should put the whammy on reform
efforts is to argue that a family should not refinance their home
mortgage because of points, fees and other transaction costs --
even though the family could save tens of thousands of dollars over
the long run due to the lower interest rates won in the deal.
One reason Social Security is such a fiscal mess today is because
it is financed on a pay-as-you-go basis without any recognition of
the $27 trillion IOU it has promised future retirees.
Congress easily ignores the cost of these promises because it
writes the budget the same way -- considering only one year's
tax revenues and one year's expenses. Congress does not consider
the long-term obligations created by entitlement programs such as
Social Security and Medicare that will be paid past an arbitrary
five- or 10-year window. This, too, must change for Congress to
address the federal government's finances in an honest, responsible
And lawmakers don't have the luxury of time to dither over whether
or not to act. Whoever is elected president this November will
preside over the retirement of the first of the baby boom
generation on January 1, 2008. In 2009, Social Security's surplus
will stop growing, beginning the fast decline into a sea of red
The longer Congress
waits to fix Social Security, the more expensive and painful the
fix -- and the transition -- will be.
Acosta Fraser is director of the Roe Institute
for Economic Policy Studies at The Heritage Foundation
Distributed nationally on the Knight-Ridder Tribune wire
In his acceptance speech at the Republican National Convention, President Bush revived several initiatives from his first presidential campaign.
Alison Acosta Fraser
Director, Thomas A. Roe Institute for Economic Policy Studies
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