- The Washington Times - Tuesday, February 8, 2005

At long last, we finally begin to get some meaningful details about President Bush’s Social Security reform proposal.

Inevitably, this is already starting to change the debate on this issue. Up to now, all we have heard is Mr. Bush wants to set up some sort of private accounts as part of Social Security. But we have heard nothing about how such accounts solve Social Security’s long-term financing problems.

Obviously, private accounts per se accomplish nothing unless accompanied by reduced future benefits for those with the accounts. Indeed, without benefit cuts, creating private accounts will worsen Social Security’s financial woes because Social Security taxes would be diverted into the accounts.

I have heard more than a few people discuss Social Security reform as if the private accounts will magically fix Social Security without any need to cut benefits. Indeed, they adamantly insist there be no cut in benefits whatsoever, now or any time in the future.

Obviously, that is ludicrous. Creating private accounts has always been part of a tradeoff. Workers would lose future Social Security benefits, which is what stabilizes the system’s finances, and the income earned on the accounts will compensate for that loss.

To induce people to make this tradeoff, Mr. Bush strongly emphasizes the status quo is unsustainable in the long run. He points often to the fact the Social Security trust fund will be exhausted in the year 2042. At that point, current projected revenues from the payroll tax will cover only about 75 percent of promised benefits. The implication is that benefits will either have to be cut across the board by 25 percent or the payroll tax rate will have to rise about 4 percentage points.

In other words, reforming Social Security now is less risky than doing nothing, as Democrats favor. When they scare people with talk of benefit cuts, Democrats in effect promise something they cannot deliver. As many workers have discovered in recent years, bankruptcy of private businesses often leads to a loss of pension benefits.

What is always left out of this scenario is that the Social Security tax begins falling as a net contributor to federal revenues in 2008, when the surplus of Social Security taxes over benefits will peak at 0.8 percent of the gross domestic product. After that, this figure gradually falls to zero in 2018 and becomes negative thereafter. By 2045, the shortfall between Social Security taxes and benefits will equal 1.7 percent of GDP.

This means that, long before the trust fund is exhausted, income taxes must rise by an amount equal to difference between current Social Security revenues and benefits. In other words, income taxes will have to go up by about 2 percent of GDP between now and when the trust fund is exhausted to redeem the bonds it holds, which will be cashed in to pay benefits over and above Social Security taxes.

But on the date the trust fund is exhausted, taxpayers will have paid off their debt to the trust fund. Thus income taxes could theoretically fall by 1.7 percent of GDP that day. If the payroll tax had to rise by the same amount, most taxpayers would be unaffected. Their income taxes would then go down by exactly the same amount their payroll taxes rise.

More likely, Congress would simply authorize general revenue financing for Social Security, which happens when the trust fund is drawn down. In short, absolutely nothing would change for either taxes or benefits the day the trust fund is exhausted.

This means there is no apocalypse in 2042 in which anyone’s benefits will suddenly be cut or their taxes sharply raised. The implicit tax increase will occur gradually long before, and Congress will never allow benefits to be cut in that manner. It would take only hours for Congress to authorize general revenue financing if there are no changes in the Social Security program over the next 37 years.

Still, it is very undesirable to raise taxes by the equivalent of 2 percent of GDP over the next several decades to pay benefits. That would be equivalent to raising income taxes 34 percent this year. This is the real reason for Social Security reform — not looming bankruptcy, which will never be allowed.

Apocalyptic rhetoric may be politically useful to sell a controversial Social Security reform plan. But the real purpose for the reform is to prevent a massive income tax increase, not because anyone’s benefits are threatened by inaction.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.


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