Best way to save Social Security
MINNEAPOLIS — Last week two more Democrats joined the presidential race. With so many candidates in the mix, it might seem reasonable to expect a diversity of opinion on major issues. Yet when it comes to Social Security's future, there is little being said by these candidates aside from a promise to protect the status quo. Most private-sector economists and policy analysts, however, have long warned that the status quo is unsustainable.
Many of these same experts have advocated transforming America's insolvent, "pay-as-you-go" Social Security program into a fully funded system of personal accounts, where individuals could invest their payroll taxes in diversified market investments, protecting Social Security funds from political misuse and building assets to pass on to their families. In a recent analysis the non-partisan Congressional Budget Office (CBO) came as close as a government entity ever has to endorsing personal accounts as the best way to increase savings and build assets for the future.
The widely overlooked June 16 CBO report, "Acquiring Financial Assets to Fund Future Entitlements" examined the options available to fund Social Security in the future. The current Social Security trust fund, which holds government bonds purchased with Social Security payroll-tax surpluses, was one such attempt to prefund future retirement benefits. But most analysts now hold it as an example of what not to do. The government used payroll-tax surpluses to avoid making tough choices in addressing deficits in the rest of the budget. And in 15 years, when the government must begin redeeming the trust fund, it will have to raise taxes or cut spending. While the trust fund looks like savings, it is really just paper assets that will have no alleviating effect on Social Security's future funding problems.
As alternatives, some have proposed either to "lock-box" Social Security surpluses for the future or to invest those surpluses directly in private stocks and bonds.
But would these plans work? The CBO seems doubtful.
Regarding the lock-box, the CBO says that some policymakers have suggested that in a time of budget surpluses, the government could credit the Social Security trust funds with more government bonds. When money was eventually needed to pay benefits, the government could sell the bonds. While that strategy may appear to be reasonable, the eventual sale of those bonds would have the same effect as the government borrowing the money then. The experience of the past several years shows that even if politicians promise to "lock-box" Social Security surpluses, events such as terrorism, war, and recession could quickly cause them to change their minds.
What about letting the government invest the Social Security trust fund in the stock market? Government investment shares the same problem as the lock-box: There is no guarantee that surpluses won't be spent elsewhere, leaving nothing to invest. But it's even worse than that. The CBO notes that even if the government could run surpluses and devise an effective means to save them, the issue of having the government own private businesses would remain. Government ownership of stocks could affect corporate decisionmaking, interfere with the nation's competitive market system, and impede the efficient operation of financial markets - potentially limiting economic growth.
Federal Reserve Chairman Alan Greenspan makes the same point everytime he's asked: Government ownership of American businesses has the potential to do as much harm as good, and it's best for Social Security to steer clear of this danger.
Simply put, it's very hard for government to prevent the spending of Social Security money because it's the government itself that wants to do the spending. As the CBO clearly states: Even if the government had surplus receipts to invest, it's doubtful that a process to protect them would be sustainable. A future Congress, confronted by war, recession, or other urgencies, could spend the invested resources or could run larger budget deficits or smaller surpluses that offset the effect of boosting saving. Future Congresses aren't bound by the policies of preceding Congresses, so it would be easy for them to go back on any commitment to save Social Security surpluses.
If trust funds, government investment, and lock-boxes can't work, what else could?
The CBO agrees with many private analysts that personal accounts - where Social Security money would be held by individuals rather than the government - offer the best chance for success: Assets set aside to fund future obligations are most likely to be insulated by a system in which ownership and control rest with individuals. In that circumstance, each participant has property rights and legal recourse to guard against the diversion of resources. If the money didn't belong to individual participants, future policymakers could find alternative uses for it - to create a new benefit, fund a new program, or perhaps cover a budget gap.
Personal accounts may not be a perfect solution to government's lack of discipline in managing Social Security money for the future. But when it comes to saving, which is crucial if Social Security is to survive the retirement of the baby boomers, the nonpartisan CBO found that personal accounts are the best alternative available.
Unfortunately, a little-read government report isn't going to lead this debate forward. For that, we need candidates who are willing to help the public understand that when it comes to Social Security's future, doing nothing is no longer an option.
• Timothy J. Penny, a former Democratic congressman from Minnesota, is a senior fellow at the University of Minnesota Hubert H. Humphrey Institute of Public Affairs.