Once again, Bill Clinton is trying to outdo Congress in protecting Social Security. Two years ago, he challenged the Congress to save 60 percent of the surplus for Social Security. In this year’s budget, Clinton is proposing a «Social Security solvency lock-box» that is intended to secure every dollar of the Social Security surplus for Social Security.
There is only one place to put the Social Security surplus – in the Personal Retirement Accounts of hard working Americans
Clinton’s lock-box plan is nothing more than a scheme to use more than $3 trillion in Social Security surpluses to buy down federal debt. In exchange, the Social Security trust fund gets another $3 trillion worth of IOUs. To be sure, most Americans would rather pay down the debt than use Social Security’s surpluses to fund pork barrel projects. But make no mistake, once that money is spent – to buy down debt or fund new programs – it will not be there to cover Social Security’s long-term liabilities.
As most Americans are becoming aware, in 2014 Social Security will begin spending more on benefits than it collects in payroll taxes. Ten years later, its annual deficits will reach $370 billion, and by 2034, when today’s 33-year olds begin to retire, the program will be mired in $800 billion deficits. Over the next 75 years, those deficits total $122 trillion, or $19 trillion after adjusting for inflation.
And those liabilities are enormous
As most Americans are also learning, there are only three ways to deal with this financial crisis: raise taxes, cut benefits, or borrow more money. These options will be the same regardless of how many IOUs are in the Social Security trust fund or how much debt is retired over the next decade. Indeed, even if Washington were to retire the entire national debt this afternoon, Social Security would still begin deficit spending by the time today’s five-year olds enter college.
But Clinton’s plan is likely to appeal to most Americans because it plays to their desire to reduce the national debt and it takes advantage of their misperceptions (as well as the media’s) of Social Security’s fictional bookkeeping system. The bottom line is that adding $3 trillion in IOUs to the Social Security trust fund, as the president’s plan would do, can make the system look healthier on paper, but it does not create any real assets that can be drawn down to cover the system’s shortfalls.
Most government experts acknowledge that Social Security’s trust fund is little more than a ledger entry. Indeed, in last year’s budget documents, experts within the Clinton’s own Office of Management and Budget wrote:
«These balances [within the trust fund] are available to finance future benefit payments and other trust fund expenditures – but only in a bookkeeping sense. Unlike the assets of private pension plans, [government trust funds] do not consist of real economic assets that can be drawn down in the future to fund benefits.» The Congressional Research Service has written much the same thing:
«While the trust funds have an important role in monitoring the finances of the program and maintaining its fiscal discipline, they are basically accounting devices. The federal securities they hold are not assets for the government…[they are] a form of IOU from one of its accounts to another…Those claims are not resources the government has at its disposal to pay for future Social Security claims. Simply put, the trust funds do not reflect an independent store of money for the program or the government…» There is only one «lock-box» that will honestly keep politicians from raiding Social Security – a personal retirement account owned by individual workers. So instead of using these surpluses to buy down debt and create a mountain of IOUs, Congress and the White House should allow workers to divert their portion of the surplus payroll taxes into personal retirement accounts under their control. Personal retirement accounts are not only the best way of building individual retirement wealth, they effectively «pre-fund» Social Security which will dramatically reduce its long-term liabilities.
This year, the Social Security surplus will total $167 billion – equal to more than $1,100 for every worker who currently pays taxes into the program. Rebating this surplus to workers would finance a payroll tax cut of about 4 percentage points (out of the 12.4 percent payroll tax) without affecting current benefit payments. This means that a couple making $50,000 annually could put $2,000 into their account each year, or $20,000 over the next decade.
If American workers were allowed take the money Clinton wants to use to buy down debt, and invest it in their own personal retirement accounts earning, say, 8 percent annually, they would own nearly $6 trillion in assets by the time Social Security goes into deficit in 2014; and, they would own $56 trillion in assets by the time the trust fund runs out of IOUs in 2034. Talk about owning a piece of the rock.
While this plan may conjure up images of stacks of cash waiting in Fort Knox for the Baby Boomers to retire, the reality is that his plan leaves the vault empty when the program begins to run large cash deficits in just 14 years
Americans clearly want to «save» Social Security and pay down the national debt. But they should not fall for gimmicks, such as Clinton’s «lock-box,» that promise to do both with the same money. If we’re going to pay down the debt we should use the savings from spending cuts or the sale of unneeded assets, not a raid Social Security’s surplus. There is only one place to put the Social Security surplus, in the personal retirement accounts of hard working Americans.