- The Washington Times - Monday, September 20, 2004

In his acceptance speech at the Republican National Convention, President Bush revived several initiatives from his first presidential campaign. Not the least was a pledge to “fix” Social Security by letting younger workers invest some of their payroll taxes in personal retirement accounts.

Opponents of modernizing the Depression-era system quickly jumped on the proposal as too costly. But such criticisms are penny-wise and pound-foolish.

Trying to keep the ailing system going another generation will wind up costing taxpayers far, far more than making reforms today. Demographic realities — the increasing longevity of Americans and the mass, looming Baby Boomer retirements — make it impossible to maintain the current system indefinitely.

Fifty years ago, the ratio worker-to-retiree ratio was 16:1. Those days are long gone. Now only 3.3 workers pay into the system for every benefit recipient. When today’s new workers are ready to retire, the ratio will be even smaller, just 2:1.

Mr. Bush would maintain the current benefit system for those at or near retirement age but give younger workers the option of investing some of their payroll taxes into a personal retirement account that will earn interest and belong to them.

This approach is expensive because of the need to continue paying full benefits to those still completely in the current system while younger workers assign part of their money (that would otherwise help pay current benefits) to personal accounts. In other words, these so-called “transition costs” come from changing the program’s cash flow.

Admittedly, these reforms are costly. The Social Security Administration has analyzed a number of Social Security plans similar to that outlined by the president. Its estimates of transition costs of these plans run as high as $2 trillion over the first 10 years, and from $7 trillion to $8 trillion total before the transition is completed in midcentury.

Critics of personal accounts stress the transition costs while ignoring the costs of not making the transition. Newsday columnist Marie Coco dismissed the president’s plan as “a jumbo mortgage, taken out against the nation’s future.” The analogy is off because that mortgage has already been taken out.

The latest report by the Social Security Trustees pegs the system’s unfunded obligation at $27 trillion, making transition costs pale in comparison. Simply doing nothing and maintaining the status quo will cost 3 to 4 times as much as transitioning to a personal-account system that provides retirees will own, control and can pass on to their heirs.

To argue that high transition costs should put the whammy on reform efforts is to argue that a family should not refinance their home mortgage because of points, fees and other transaction costs — even though the family could save tens of thousands of dollars in the long run due to lower interest rates.

One reason Social Security is such a fiscal mess is that its financing as a pay-as-you-go without any recognition of the $27 trillion it has promised future retirees.

Congress easily ignores the cost of these promises because it writes the budget the same way — considering only one year’s tax revenues and one year’s expenses. Congress does not consider the long-term obligations created by entitlement programs such as Social Security and Medicare that will be paid past an arbitrary five- or 10-year window. This, too, must change for Congress to address the federal government’s finances in an honest, responsible way.

And lawmakers don’t have the luxury of time to dither over whether to act. Whoever is elected president this November will preside over the retirement of the first of the Baby Boom generation on Jan. 1, 2008. In 2009, Social Security’s surplus will stop growing, beginning the fast decline into red ink.

The longer Congress waits to fix Social Security, the more expensive and painful the fix — and the transition.

Alison Fraser is director of the Roe Institute for Economic Policy Studies at the Heritage Foundation.

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