We’ve all heard a great deal over the last six months about President Bush’s call for social security reform. Although I believe he should’ve started with tax reform, he’s correct to encourage Congress to take action. Much of the information regarding his plans is vague, which mostly seems like a (correct) political play to get the topic in the national debate. But, for various missteps and bouts of irrational rhetoric, reform momentum seems to have faded away. Of course, we’d all like to pretend we can run away, but the problem is here until we deal with it. And even though I despise the government imposing mandatory “savings” minimum on me, I understand the social costs of a large percentage of workers saving nothing for retirement, thus creating an unfair (and economically ruinous) burden on society. There is a rational government interest in not having American cities cluttered with poor, homeless elderly and disabled. So I will issue no call for revolution. I welcome new proposals which serve to meet that alleged social security goal of a social safety net. Unless they’re ill-conceived.
Ceaseless pounding by liberals has driven many Republicans into a defensive crouch. It’s time for some political jujitsu that will instead focus the public’s attention on stopping Congress from spending the extra payroll taxes now flowing into Social Security on anything else. The only effective way to prevent that would be to take the money off the table by starting personal Social Security accounts for every American who wanted one.
I agree that we need to stop Congress from spending the extra payroll taxes. As I’ve mentioned in the past, as a self-employed taxpayer, I have the pleasure of paying both employee and employer payroll taxes out of my income. Admittedly everyone pays this because if employers didn’t have to pay it, it would lead to higher salaries (with the additional tax going to the IRS) but my point is still the same. I see the direct impact of our social security taxation scheme. It’s atrocious and must change. Any proposal that offers me more control over the money I pay so that I may one day see a return of that money earns my attention. If it also limits the government’s ability to recklessly spend my money for other purposes, that’s a wonderful bonus.
However, if I must save a specific portion of my income every year, I should be allowed to control the investment mix. At only 31-years-old, I’m not at the point where I need an ultra-conservative investment strategy. While I also will not pretend that purely speculative securities would be wise for social security savings, some risk (and diversity of choice, i.e. international stocks versus U.S. blue chips), especially for those willing to learn and actively participate in their investments, should be
encouraged allowed. So my first choice is not to have a personal lockbox account of any sort because I fear the investment options will be too limited, yet to expect anything else borders on fantasy.
Mr. Fund’s hypothetical personal lockbox under the DeMint/Graham/Santorum proposal meets my “worst-case scenario” test. Consider:
Politically, their proposal does disarm some of the most oft-used arguments against reform. It would create no new debt for the government because, unlike President Bush’s proposal, the personal accounts would use only the surplus payroll taxes now flowing into the Treasury. That surplus will hit some $85 billion next year, and grow in succeeding years to the point that it could provide every worker who wanted one with a personal account of some $1,200. The surpluses will total some $2.5 billion until 2017, when Social Security starts running a deficit as baby boomers begin to retire. Preventing that money from being “raided” by a spendthrift Congress and White House could be enormously popular with a cynical public.
In addition, if the personal accounts were limited to no-risk, but marketable, Treasury bills, the argument about the “scary and risky” stock market investment of payroll taxes would be neutralized. Converting the nonmarketable IOUs the government now holds into marketable Treasury bills issued to taxpayers would create an asset that individuals would own and be able to pass on to their heirs. If history is a guide, such risk-free Treasurys would earn an annual rate of return of between 2.5% and 3%–much better than Social Security will deliver. The surpluses would become real assets owned by citizens rather than government IOUs (or, more accurately, “I owe me’s”) piling up in a filing cabinet in West Virginia.
Where to begin? While there are several issues in there, I’ll focus on one. “…if the personal accounts were limited to no-risk, but marketable, Treasury bills, the argument about the ‘scary and risky’ stock market investment of payroll taxes would be neutralized.” Ummm, no. Sure, such a plan would then securitize a portion of my social security funds, but how is this plan wise? More importantly, how is it any different than what we have today? The government would no longer have “I owe me’s”, but I would have “I owe me’s”. This sleight of hand offers the warm, fuzzy fiscal value of ownership, but I don’t really own anything I didn’t own before (other than the ability to pass that asset on to heirs, which is something). Every taxpayer is the government. The IRS is only the middleman.
Rather than explain this sleight of hand, allow me to illustrate it. This diagram shows how Mr. Fund’s idea would work. Notice that the government would still spend the same amount under this proposal as it does today when it is “allowed” to spend the surplus. Consider:
It’s simple. While I get the asset worth $1,200, the Treasury still has my $1,200 to spend on however Congress decides. The only difference is that the government no longer has an IOU in a filing cabinet in West Virginia. Now it has a item on its balance sheet showing an extra $1,200 in Treasury bills, which it will have to repay in the future. Again, Congress can still spend my $1,200.
What happens when those Treasury bills mature? Oh, here’s where it gets interesting. Mr. Fund does offer a proposal for this inevitable scenario. Consider:
Would the deficit increase if Congress used the Social Security surpluses to create personal accounts rather than finance current government spending? Not if Congress found the will to cut federal spending by roughly 3% a year. Even if they don’t, the unavailability of the payroll taxes to fund other programs could be useful. As Federal Reserve Chairman Alan Greenspan told Congress in March, “One can credibly argue that [the trust funds] have served primarily to facilitate large deficits in the rest of the budget.” He went on to argue that personal accounts would add to overall savings, which “in turn, would boost the nation’s capital stock. The reason is that money allocated in the personal accounts would no longer be available to fund other government activities.” In other words, once Congress couldn’t get its mitts on the payroll tax money, it would be put to more productive use in the hands of individuals owning their own accounts.
“Not if Congress found the will to cut federal spending by roughly 3% a year.” Ahahahahahahahahaha. Ahahahahahahahaha. That’s a
good one. Raise your hand if you have faith in this Congress to cut spending. Ignore partisanship because Republicans and Democrats are equally responsible. (Ms. Coulter, that means you must put your hand down, now. Now. Thank you.)
Mr. Fund even argues the
possible inevitable scenario where Congress doesn’t cut spending. Remember, he argues “the unavailability of the payroll taxes to fund other programs could be useful”. But I’ve already shown you that, under his proposal, Congress can spend the surplus payroll taxes. The accounting is the only aspect that changes.
So let’s return to the obvious, logical question. What would the future look like when those Treasury bills mature? I have two illustrated scenarios for your consideration. On the left is the expected scenario, a tax increase to cover the maturing Treasury bills. On the right is Mr. Fund’s hopeful scenario, a 3% Congressional spending cut. Tell me if you like either scenario.
Again, in both scenarios, the $1,200 for personal lockbox accounts continues. However, the additional $1,200 for maturing Treasury bills must be accommodated. Either taxes increase, or we get fewer services. I, of course, am all for fewer services, but until Congress shows some resolve to implement that, I’m not expecting it. Because today’s political decisions have consequences, prepare for tax increases.
At least the social security crisis will be resolved.
(Link via Instapundit)