Best Way to Save Social Security

Article excerpt

Last week two more Democrats joined the presidential race. With so many candidates in the mix, it might seem reasonable to expect a diversity of opinion on major issues. Yet when it comes to Social Security's future, there is little being said by these candidates aside from a promise to protect the status quo. Most private-sector economists and policy analysts, however, have long warned that the status quo is unsustainable.

Many of these same experts have advocated transforming America's insolvent, "pay-as-you-go" Social Security program into a fully funded system of personal accounts, where individuals could invest their payroll taxes in diversified market investments, protecting Social Security funds from political misuse and building assets to pass on to their families. In a recent analysis the non-partisan Congressional Budget Office (CBO) came as close as a government entity ever has to endorsing personal accounts as the best way to increase savings and build assets for the future.

The widely overlooked June 16 CBO report, "Acquiring Financial Assets to Fund Future Entitlements" examined the options available to fund Social Security in the future. The current Social Security trust fund, which holds government bonds purchased with Social Security payroll-tax surpluses, was one such attempt to prefund future retirement benefits. But most analysts now hold it as an example of what not to do. The government used payroll-tax surpluses to avoid making tough choices in addressing deficits in the rest of the budget. And in 15 years, when the government must begin redeeming the trust fund, it will have to raise taxes or cut spending. While the trust fund looks like savings, it is really just paper assets that will have no alleviating effect on Social Security's future funding problems.

As alternatives, some have proposed either to "lock-box" Social Security surpluses for the future or to invest those surpluses directly in private stocks and bonds.

But would these plans work? The CBO seems doubtful.

Regarding the lock-box, the CBO says that some policymakers have suggested that in a time of budget surpluses, the government could credit the Social Security trust funds with more government bonds. When money was eventually needed to pay benefits, the government could sell the bonds. While that strategy may appear to be reasonable, the eventual sale of those bonds would have the same effect as the government borrowing the money then. The experience of the past several years shows that even if politicians promise to "lock-box" Social Security surpluses, events such as terrorism, war, and recession could quickly cause them to change their minds.

What about letting the government invest the Social Security trust fund in the stock market? Government investment shares the same problem as the lock-box: There is no guarantee that surpluses won't be spent elsewhere, leaving nothing to invest. …