- The Washington Times - Tuesday, November 9, 2004

Any proposal to allow workers to shift payroll taxes to personal accounts creates a transition financing issue. That results because Social Security operates on a pay-as-you-go basis. The money paid into Social Security by today’s workers is not saved and invested for their future retirement. Instead it is mostly immediately paid out to finance the benefits of current workers. The future benefits of today’s workers are then to be paid out of the future taxes of future workers.

In a system like this, if workers shift a large portion of their payroll taxes to saving and investment in their own personal accounts, those funds will not be available to finance currently promised benefits. Consequently, any personal account plan must provide for transition financing to make sure those benefits are paid in full, until the accounts in the future start paying the benefits to retirees.

The best means for financing this transition is by reducing the rate of growth of total federal spending. To the extent the transition can be financed by eliminating wasteful or counterproductive federal spending, that would be another net gain from the reform, not a cost. This is economically the best means of financing the transition because it does so by eliminating a negative drag on our economy, and uses those resources instead for highly productive saving and investment.

This spending restraint can be accomplished through a national spending limitation measure that would reform the congressional budget process to put limits on total federal spending growth, as in the Ryan-Sununu bill. That bill requires a two-thirds vote of each house of Congress to exceed the spending limit in any year. The budget process in each house is also subject to a point-of-order objection by any member to stop any violation of the spending limits.

The Heritage Foundation recently proposed a stricter national spending limitation measure than in Ryan-Sununu, supported as a matter of general budget policy. That measure would finance even more of the transition to personal accounts by reduced federal spending growth.

The public generally recognizes federal spending has been growing wildly out of control the last several years. A personal account plan financing part of the transition with a national spending limitation measure becomes a vehicle to help control federal spending. That makes the spending limitation measure a political benefit for the reform, as well as an economic benefit.

This is not to suggest all the transition can be financed by reduced federal spending growth. Other desirable transition financing sources are higher revenues due to greater economic growth from the reform, and short-term federal debt that is later paid off from the benefits of the reform. But the transition should be financed by reduced federal spending to the extent possible.

Some suggest national spending limitation is not a reliable source of transition financing because one Congress cannot bind future Congresses to any spending limits. But this is true of any other source of transition financing as well.

A tax increase adopted to help finance the transition can be repealed by a later Congress. Or that tax increase may be used to justify tax cuts elsewhere in later successful Congressional or presidential campaigns. Reductions in future Social Security benefits meant to help finance the transition can also be later reversed.

Future Congresses may, in fact, want to change how they finance the transition over time. But spending restraint is at least as manageable and reliable as the alternatives, and perhaps more so, for several reasons.

First, national spending limitation provisions like those in Ryan-Sununu cannot be easily overcome. A two-thirds supermajority requirement for faster spending increases, and the right of each member to raise a point of order objection against limit violations would surely help reduce spending growth.

Moreover, general federal spending restraint has broad public support. Many, many voters believe federal spending has grown far too fast and would vote against legislators who approved exceeding the limits and running up federal deficits and debt.

Any personal account bill would powerfully restrain federal spending simply by taking the money of the table. With large sums of payroll tax revenues going into personal accounts, and the unavoidable mandate to pay all promised Social Security benefits to retirees, Congress will be forced to spend less than it would otherwise. Milton Friedman has, indeed, long argued the best way to restrain federal spending is to just reduce what is available for Congress to spend.

Stephen Moore is president of the Club for Growth. Peter Ferrara is director of the Club’s Social Security Reform Project and ia senior fellow at the Institute for Policy Innovation.

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