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Dollars, Sense and Social Security

Inaction is the enemy. Personal accounts can be part of a solution.

December 13, 2004|Olivia S. Mitchell and Thomas R. Saving | Democrat Olivia S. Mitchell, a professor at the Wharton School at the University of Pennsylvania, and Republican Thomas R. Saving, an economics professor at Texas A&M, were on the President's Commission to Strengthen Social Security.

As is true for all important public policy issues, the proposals for fixing Social Security don't condense easily into simple sound bites. Right now, the debate is being clouded by the claim that creating personal Social Security accounts would give rise to huge "transition costs" that we otherwise would not have to face.

In reality, the question isn't whether or not there will be costs involved in dealing with Social Security's problems, but how much they will be and when they will be paid.

Let's clear the air by reviewing key facts about Social Security. First, the good news: Today's retirees and those nearing retirement will get their benefit checks. Currently, the Social Security system takes in more in taxes than it uses to pay benefits each year.

Next, the bad news: In less than 15 years, a shrinking workforce and the retirement of the baby boom generation will result in payroll taxes falling short of what is needed to continue paying Social Security benefit checks. At that point, the system will begin to draw down the Social Security trust fund, made up of surplus payroll taxes previously paid into the system.

Unfortunately, the trust fund is full of IOUs because the government has not saved these surplus payroll taxes. The trust fund simply represents the promise of one part of government (the Treasury Department) to another part (the Social Security Administration) to find those dollars when they are needed.

How much are the IOUs worth? $1.9 trillion. To come up with that, other government programs will need to be cut, taxes will need to be raised or new borrowing will need to occur. And even then, the Social Security actuaries tell us that by 2042 the trust fund will be used up, and there will still be a substantial shortfall between promised benefits and the amount payroll taxes bring in.

Which brings us to the ugly: When the trust fund runs out, benefits will have to be cut by 30% or payroll taxes will have to rise by 50% to 80%.

When you put the good, the bad and the ugly together, what you've got is this: Over the next 75 years, the shortfall between payroll taxes and promised benefits will total $26 trillion (in 2004 dollars). If we had $10 trillion that we could invest right now, we could meet that obligation, but $10 trillion is about the size of the entire U.S. economy. Talk about "transition costs"!

That brings us to finding a way to make Social Security sustainable and solvent for the long run. The bipartisan President's Commission to Strengthen Social Security, convened by President Bush in 2001, proposed offering voluntary personal retirement accounts, similar to 401k plans and reducing the growth rate of future benefits.

Over the long term, the cost of the commission's proposal is far less than having to raise payroll taxes 50% to 80%. In fact, the Social Security Administration estimated that the commission's approach would cost about $700 billion -- much less than the $2 trillion bandied about by the opponents of personal Social Security accounts.

Every year we delay reform of the Social Security system we lose options. We are closing in on the point at which payroll taxes will fall below promised benefits, and we must act to restore the system's crucial role in retirement security.

Americans need a clear understanding of the situation and the costs and benefits of reform. To get the ball rolling, we should start by recognizing the costs of doing nothing and the consequences of inaction.

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