October 28, 1999
By David C. John
Some things do not improve with age. In his most
recent State of the Union address, President Bill Clinton announced
a plan to "save" Social Security and fund a new type of retirement
savings account. The response, even among unbiased observers, was
almost uniformly negative. Federal Reserve Board Chairman Alan
Greenspan sharply condemned the President's proposal to invest part
of Social Security's trust fund in stocks. U.S. Comptroller General
David Walker said the proposal "does not represent a Social
Security reform plan." Now, 10 months later, the President has
announced a new plan that is at least as bad as the first one.
new Clinton plan, as introduced in H.R. 3165 by Representative
Richard Gephardt (D-MO), retains most of the first plan's
weaknesses and proposes spending another $544 billion from general
revenues to prop up the Social Security system a little longer.
Once again, the President is trying to avoid making hard but
necessary decisions. Like a magician, he keeps trying to give
Americans the illusion that Social Security's bottom line is
improving. But this plan will do nothing to solve the system's
deep-seated problems. The best that can be said is that the
President dropped his effort to have the government invest Social
Security money in the stock market.
Creative Accounting, Not Reform.
Washington routinely uses excess Social Security revenues to pay
for other programs. Social Security tax dollars that are not used
immediately to pay benefits are sent to the U.S. Treasury, which
then gives the Social Security trust fund an IOU in the form of a
government bond. This practice merely obligates future workers to
pay extra taxes to cover future benefits. The President's new plan
would not change this. In addition, he would spend over half a
trillion dollars from other taxes to prop up Social Security.
Nothing would be done to improve its poor rate of return.
Under the President's new plan, Social
Security tax dollars in excess of benefits paid each year would
still go to the Treasury in return for an IOU. Those same tax
dollars would be used to buy back government bonds owned by the
President claims that this technique would lower the amount the
government would have to pay in interest on the federal debt. The
taxes that normally would go to pay this interest--an estimated
$544 billion between 2011 and 2015 alone--would be spent to buy
back still more of the public debt in the form of government bonds,
which would be placed in the Social Security trust fund. Using
extremely complex and creative accounting, the President then finds
a way to pay interest on the amount of interest that he already
claims to have saved. Between 2016 and 2044, this mythical interest
on interest amounts to $47 billion a year. But actual Social
Security tax dollars collected from workers would still be spent
and would never reach the trust fund. All that would happen is that
the number of IOUs in the trust fund--representing nothing more
than a legal obligation on tomorrow's taxpayers--would
President Clinton's new plan will not
solve Social Security's underlying problems. Specifically:
The Clinton plan does nothing to save
or reform Social Security. The Social Security Administration's
numbers show that the program would still run a cash flow deficit
of $252 billion (in 1999 dollars) in 2030 and $516 billion in 2070.
After studying the President's first proposal, the U.S. General
Accounting Office told Congress earlier this year that "Although
the trust funds will appear to have more resources...in reality,
nothing about the program has changed." Rather than make any of the
necessary and hard decisions needed to preserve the program for
future generations, the President would use bookkeeping tricks and
the promise of future tax money to avoid real reform. This is
shortsighted and irresponsible.
More bonds do not mean more
security. Essentially, the Clinton plan would add IOUs to the
Social Security trust fund; it would not provide additional money
with which to redeem the IOUs already in the trust fund or to pay
Using general tax revenues for Social
Security would set a dangerous precedent. Social Security has
always been self-funded through an explicit tax. However, the IOUs
added to the trust fund under the President's plan would have to be
repaid with general tax revenues. Funding the system with other tax
dollars would break down what little fiscal discipline remains and
open the door to more irresponsible spending.
Saving Social Security. Congress
should ignore the latest Clinton proposal and implement real
reforms that would save Social Security:
Allow workers to use some of their
existing Social Security taxes to create individual accounts within
Social Security. This new "Social Security Part B" program
should be part of a larger solution to the system's existing
Recycling tax dollars will do nothing to
improve the retirement security of working Americans.
Unfortunately, the President's new plan will only make the
situation worse and place future Social Security retirement
benefits in greater jeopardy.
John is Senior Policy Analyst for Social Security at The
President Bill Clinton announced a plan to "save" Social Securityand fund a new type of retirement savings account.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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