October 26, 2000 (wall street journal)
Social Security Showdown
Mr. Gore and spinners such as the Secretary of the
Treasury and Ed Asner have been running around suggesting that Mr. Bush
cannot both fund private retirement accounts for workers and give current
retirees their benefits. The pitch is that the $l trillion over 10 years
necessary to fund private retirement accounts would have to come out of
benefits being paid to current retirees.
This is nonsense. Right now, today, taxation is
pouring more money into the Social Security
system than is needed to cover all promised
benefits to current retirees. Indeed, Social Security
has been generating a surplus since 1984 and will
continue to have a surplus until 2025. When Mr.
Bush's plan for private accounts is factored in,
there will be sufficient resources to cover current
retirees and those now nearing retirement until
2023. Under the Bush plan, part of those surpluses
($1 trillion) would be used to fund private accounts
and the rest ($1.4 trillion) would be used to fund
promised benefits.
But we want to make a larger point. Any person who takes the time to
read through the candidates' proposals would realize that while the Bush
campaign has been actually thinking through the problem of Social Security
reform, the Gore campaign has -- we imagine -- been frolicking on the
Planet Debby. In fact, Mr. Bush deals with the unpleasant reality that
Social Security, untouched, is underfunded if it is to provide promised
benefits for all future retirees. By contrast, Mr. Gore offers a lot of hot air
about lock boxes.
This underfunding is being driven by demographic
changes. When the boomers begin to retire in
2010 (and thus become retirees), there will be,
increasingly, fewer workers to support more
retirees, who will also be living longer and drawing
benefits for a longer period. Put another way, there
will be fewer workers and thus less payroll-tax
revenue to support more retirees who require
greater expenditures.
Right now, today, the Social Security surplus is
flowing into the Treasury, which then sends it back
out to pay down the national debt. In return, the
Treasury gives Social Security IOUs, or
special-issue Treasury securities, for both the cash money and the interest
that money would have earned if it were actually in a trust fund.
The underfunding problem starts in 2015 when the Social Security system
won't be generating enough revenue through the payroll tax to cover
promised benefits. The shortfall will then have to be covered by Social
Security's interest income on its IOUs. In 2025, however, the shortfall will
have grown so that payroll taxes plus interest income is insufficient. The
shortfall will then have to be covered by redeeming the IOUs themselves.
In 2037, when all the IOUs will have been redeemed, the shortfall will be
really hanging in the wind.
Thus (if your eyes are still tracking), a cash flow problem that has started in
a small way in 2015 has become a major cash embarrassment in 2037.
And through this period, the cash problem must be remedied by cash.
So how big are the unfunded liabilities? There are lots of ways to measure
it, but we like the one provided by economists Sylvester Scheiber and
John Shoven in their book, "The Real Deal." Messrs. Schieber and Shoven
calculate the value of the liability in today's terms by looking at the stream
of funding shortfalls to 2075 and then discounting it back to the present.
Thus, the real cost in today's dollars is $3 trillion. If for example we wanted
to extinguish the unfunded liabilities today, it would require an immediate
increase of 20% in the payroll tax or a 15% across-the-board cut in
benefits -- for current and future retirees alike.
Think that's rather stiff? Well, after 2037, when the shortfall is really
hanging out for all to see, the payroll-tax increase would have to jump to
50%, or benefit reductions would have to be closer to 33%, or -- if the
shortfall is to be funded out of general revenues -- income taxes would
have to rise by 25%.
Under a President Gore plan, we lose the window of opportunity to fix
these realities. Social Security's surplus cash would be used to pay down
the national debt -- it would not be put in a "lock box" -- and the problem
of underfunding would pop up in a small way in 2015, a medium-size way
in 2025 and reach big-time proportions in 2037. Too bad, because when
Mr. Gore's lock box is opened, a bunch of IOUs will be revealed and
these IOUs would then have to be turned into cash, either by raising
payroll taxes or by cutting benefits or by more borrowing or by raising
income taxes to fund the shortfall out of general revenues.
Mr. Bush's plan offers not only the happy ability to allow private accounts
and take care of current retirees and those near retirement; it also offers a
way to solve the unfunded liabilities. Mr. Bush has explicitly recognized the
reality that promised benefits for future recipients must be curtailed and
suggested that some of the proposals now circulating might be considered.
Several of these, by the way, do not involve a reduction in real benefits
from one generation to another.
One way, and it would get us where we want to go in one swoop, would
be to adjust the formula by which initial payouts are calculated. Right now,
initial benefits are bumped up to keep in step with increases in real wages.
This method, however, results in ever higher benefits; in fact, by 2050 the
real value of benefits to an average worker would be 50% higher, in real
terms, than those received by workers retiring today.
If this so-called wage peg were changed to a price peg -- so that this part
of the benefit formula was sensibly indexed to the CPI -- the real value of
benefits would keep purchasing power current while eliminating the
growing subsidy to each generation.
Tidy, eh? But there are other possibilities. Take the CPI adjustment. Once
a person is on the Social Security rolls, his or her initial benefit is then
bumped up for cost-of-living increases every year to make sure benefits
never fall behind inflation. The CPI however overstates inflation. Though
the Labor Department has reduced this bias, a full adjustment would still
ensure inflation protection while cutting out the subsidy.
Further, the retirement age to begin payouts might be raised. Since each
generation of workers lives longer, on average, than the preceding one,
each succeeding generation enjoys an increase in the real value of benefits.
If the retirement age were indexed to life expectancy, then all generations
would get the same real value.
And, finally, since workers with private retirement accounts will be paying
less into the system, they should get less out of it. Social Security benefits
for those opting for their own portfolio might be reduced accordingly.
It might be possible to pick and choose from a menu of reductions in the
real rate of growth of benefits in a way that makes any so-called transition
costs to private accounts close to zero. We think that Mr. Bush is wise not
to specify these choices now. Even though cutting back these promised
benefits would restore intergenerational equity, they are tough to make and
so should enjoy a bipartisan consensus.
Once we achieve a system in which revenues and expenditures are in
balance, thereby eliminating the unfunded liabilities -- which must be done
no matter who sits in the Oval Office -- the Bush proposal to privatize
really comes into its necessary glory. Changing the tax-and-transfer aspect
of Social Security, which increasingly will become a large tax relative to a
tiny transfer, will reduce returns to horrifyingly low and even negative
numbers. Thus, supplementing the system with a way for workers to earn
higher returns in the market is both fair and sensible.
We have nattered on and haven't even told you about how private
accounts will increase national savings that, in turn, will increase
productivity growth that, in turn, will result in higher wages. But all things
considered, Mr. Bush has offered a full-service approach. Mr. Gore has
offered a lock box full of IOUs. |
