Social Security and the New Fiscal Policy

The most profound, and profoundly disturbing, innovation in budget policy during the administration of George W. Bush has been to discard the old-fashioned notion that presidents who propose a tax cut or new spending should also propose some way to pay for it. That practice, apparently, is just soooo 20th century.

Observers of this administration's fiscal policies won't be surprised to learn that the president's preferred way (according to presumably authorized leaks) to pay for the so-called transition costs of partially privatizing Social Security is to not pay for them at all. That, of course, is precisely how President Bush paid for his tax cuts, for the wars in Iraq and Afghanistan, for the Medicare drug benefit, and so on. Never mind the cost. Just put it on the national tab.

Most thoughtful proponents of privatization (and there are some) see it as a way to boost national saving. Here's the argument: An unfunded Social Security system reduces the need for individuals to save for their own retirement because government provides a basic pension. So national savings decline. A funded system, by contrast, would really accumulate assets through saving, just as funded private pension plans do. If the necessary saving is done publicly, that means reducing the overall budget deficit (which economists call government “dissaving”) through some combination of tax increases and spending cuts.

But if, instead, the nation moves toward a privatized Social Security system by diverting payroll-tax revenue into private accounts, that raises government dissaving and therefore reduces national saving. Hmm. So how do we raise national saving by reducing it?

And hasn't anyone in the administration noticed that there is a gigantic federal deficit already? Is this really a propitious time to increase it further?

Here is a stunning fact that you haven't heard from the White House: Measured over the same 75-year period that is used for Social Security calculations, the cost of the Bush tax cuts is roughly three times as large as Social Security's financing gap. That means that if the tax cuts were trimmed by just one-third and the resulting revenue assigned to Social Security, the entire Social Security deficit would disappear in a stroke.

Let's remember why we are engaged in a national debate over Social Security in the first place. It's not because the system has failed to achieve its goals, because people are unhappy with it, or even because it's soooo 20th century. The reason is simple: The government has overpromised. Social Security's commitments to future beneficiaries exceed the likely future revenue that today's payroll-tax rates will bring in -- leaving the system flush today, but in the red over the aforementioned 75-year calculation period.

Question: If you were put in charge of a system like that, what would you do? Well, you would probably propose some combination of more tax revenue and less generous Social Security benefits to bring the two into balance, which is just what the Greenspan commission proposed (and Congress enacted) in 1983. But that was back in the 20th century. Modern budget man has a more novel idea. As noted, the Bush administration wants to reduce payroll taxes and hand that money back to the people in the form of private accounts. But won't that dig Social Security's financial hole even deeper? Of course. Depending on the specific plan, these transition costs may last 50 to 75 years and add tens of trillions of dollars to the national debt. Some transition!

Naturally you don't hear any of this from the advocates of privatization. Instead, the approved White House talking points assert that privatization would save money over the long run because spending $2 trillion now would save $10 trillion later. That would be a great deal, if true. But the comparison is completely bogus. The $2 trillion refers to the estimated transition costs over the first decade, while the $10 trillion figure refers to the present value of the Social Security deficit from now until the end of time. That's why professional actuaries have warned us not to pay attention to the $10 trillion number.

In sum, Social Security does have a long-run financial problem (but not a crisis) that needs to be dealt with. Second, this problem is of manageable size. Third, financing private accounts by diverting payroll-tax revenue from the trust fund would exacerbate, not mitigate, Social Security's financial problem -- at least for many decades. Fourth, the additional deficits from Social Security privatization would be piled on top of the already large budget deficits. Dick Cheney notwithstanding, deficits do matter. And fifth, when someone tells you he can turn $2 trillion into $10 trillion, watch your wallet.

Now, don't you wish our government would return to old-fashioned 20th-century budget practices?

Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and co-director of the Center for Economic Policy Studies at Princeton University.

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