Inventing a Social Security Crisis

[Nbadan]

OP-ED COLUMNIST
Inventing a Crisis
By PAUL KRUGMAN
Published: December 7, 2004

Privatizing Social Security - replacing the current system, in whole or in part, with personal investment accounts - won't do anything to strengthen the system's finances. If anything, it will make things worse. Nonetheless, the politics of privatization depend crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it. I'll have a lot to say about all this when I return to my regular schedule in January. But right now it seems important to take a break from my break, and debunk the hype about a Social Security crisis.

There's nothing strange or mysterious about how Social Security works: it's just a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline.

Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire.

The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem.

But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come.

It's true that the federal government as a whole faces a very large financial shortfall. That shortfall, however, has much more to do with tax cuts - cuts that Mr. Bush nonetheless insists on making permanent - than it does with Social Security.

But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one.

My favorite example of their three-card-monte logic goes like this: first, they insist that the Social Security system's current surplus and the trust fund it has been ac ulating with that surplus are meaningless. Social Security, they say, isn't really an independent en y - it's just part of the federal government.

If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice.

But never mind: the same people who claim that Social Security isn't an independent en y when it runs surpluses also insist that late next decade, when the benefit payments start to exceed the payroll tax receipts, this will represent a crisis - you see, Social Security has its own dedicated financing, and therefore must stand on its own.

There's no honest way anyone can hold both these positions, but very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success.

For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it.

E-mail: [email protected]

[Nbadan]

Framing the Social Security Debate
Tuesday, Dec 07, 2004; 11:08 AM

Initial signs suggest that the White House's campaign to add private accounts to Social Security will hinge on getting the public to embrace two bold but disputable assertions.

One of those assertions is that the estimated $1 trillion to $2 trillion in new government spending required to create these private accounts is in fact not a cost but a savings.

Don't try that at home.

The other is that the Social Security system is in crisis -- $10 trillion short -- and that private accounts alone will entirely resolve the problem.

But the crisis is not imminent. And some economists question whether adding near-term debt to address a long-term problem is a good idea. Even some who support partial privatization say increased taxes or reductions in guaranteed benefits still may be needed to put the federal retirement program back in kilter.

Press Secretary Scott McClellan was the public face of the White House's first major Social Security salvo yesterday. President Bush also met privately with congressional leaders, but details were scarce.

And McClellan wasn't explaining his new assertions as much as he was repeating them -- insistently -- over and over again.

Yesterday's press briefing is worth a look.

McClellan's message of the day: "There will be some up-front transition financing that will be needed to move toward a better system that will allow younger workers to invest a small portion of their own money into personal savings accounts. But it will be a savings over the current system. The current system is simply unsustainable."

Without using the word himself, he acknowledged that borrowing is "what you're looking at doing as part of the transition to a better Social Security system."

And four times, McClellan asserted that "The cost is $10 trillion if we do nothing."

Here's an excerpt:

"Q So the principle is that at least some of the transition costs will be financed --

"MR. McCLELLAN: We keep talking about cost. It's a savings, because the cost is $10 trillion of doing nothing, and this will actually be a savings from that cost of doing nothing.

"Q The borrowed money will have to be paid back. It's not imaginary, right?

"MR. McCLELLAN: And it will be a savings over the overall costs under the current system.

"Q That's your belief, but for now, the money will be borrowed and will have to be paid back.

"MR. McCLELLAN: It will be a savings over the long-term.

"Q What about the short-term, right now --

"Q And what is the basis for $10 trillion?

"MR. McCLELLAN: Bob has the floor. April, you've had your question, Mark, you've had your question. Bob, it's your question. I'll come back to you if I can."
The Coverage

Ron Hutcheson and William Douglas write for Knight Ridder Newspapers: "President Bush on Monday signaled his determination to overhaul Social Security, even if it means piling up huge new government debt to pay for the transition to a partially privatized system. . . .

"The president didn't provide details of his proposal, but White House spokesman Scott McClellan said Bush is willing to add to government debt to cover transition costs, which are estimated at $1 trillion to $2 trillion over 10 years.

"Administration officials contend that any short-term harm from a big increase in deficit spending would be more than offset by long-term savings in the Social Security system. Independent financial experts don't necessarily disagree, but many warn that adding $1 trillion or more to government debt could be dangerous to the economy, so the details of any overhaul are of immense importance."

Hutcheson and Douglas explain the "transaction costs": "Under the current system, payroll taxes on today's workers pay for benefits to current retirees. Bush's plan would disrupt the cross-generation income transfer by letting workers put aside money for their own retirement. That would leave a big funding gap for retirees who depend on the current income-transfer system."

Warren Vieth and Janet Hook write in the Los Angeles Times: "In a meeting with congressional leaders of both parties, the president conceded that his vision for Social Security would require significant short-term borrowing, according to a participant in the closed-door session. . . .

"Independent analysts have estimated the government would initially need to borrow more than $1 trillion. The administration declined to provide its own figure, but said that if the program was not restructured to handle the coming wave of baby-boom retirees, the cost would be $10 trillion. . . .

"McClellan said the transition debt should not be regarded as a cost, because it eventually would reduce Social Security's long-term unfunded liability. That is the difference between the level of benefits promised to retirees over the next 75 years and the estimated payroll taxes that will be available to pay them.

"The shortfall is attributable in part to the looming retirements of the baby-boom generation, which will leave the nation with fewer workers supporting more retirees. According to government projections, the system will start paying out more than it takes in by 2018, and the Social Security trust fund will be depleted by 2042."

David Espo and Deb Riechmann report for the Associated Press on the private meeting with Bush: "Skeptical Democrats told the president any legislation must be bipartisan to prevail, according to participants in a session that signaled the likely start of a fierce struggle. . . .

"Bush 'said several times he ran on this' issue during his successful campaign for a second term, said Rep. Bob Menendez, D-N.J., who attended the White House session. He quoted the president as saying he 'intended to spent a lot of his political capital' on it."

Allan Sloan writes in his Washington Post business column: "Here's the deal: Say that wage earners put $60 billion a year of Social Security tax payments into personal accounts rather than having the money go to the Treasury. The Bushies argue that we shouldn't add the $60 billion to the deficit because the personal accounts would reduce the government's future Social Security obligations by more than $60 billion. Account holders, you see, would get a smaller guaranteed benefit than other Social Security recipients. Adding the personal accounts to the deficit, they say, is like prepaying your mortgage and having to show it as a loss.

"But as Peter Orszag of the Brookings Ins ution points out, a dollar of debt today is a far more tangible taxpayer obligation than a dollar of benefits years down the road. Congress can cut benefit formulas -- it has done so with Social Security, and will soon do so again. But Congress can't reduce the federal debt by fiat the way it can reduce benefits."

Sloan also writes: "You can actually make the case that the president's marketing of his Social Security 'reform' has been brilliant. Why? Because it has diverted people from asking a basic, simple question. Which is this: Wasn't Social Security designed to be a safety net for old people? When did it change from something designed to keep you from being poor into something to supposedly help make you rich?"

Washington Post