CPA answers Rep. Cooper with other Social Security facts

The Tennessean

I recently read Rep. Jim Cooper's Nashville Eye concerning Social Security. He asked Nashville-area citizens to express their views about reforming the program.

As a C.P.A., a small business owner and an instructor at APSU living in Clarksville, I've had the chance to research Social Security from several angles. I have even testified on the topic before a congressional subcommittee.

So here are my thoughts.

Social Security reform is at the top of President Bush's second term agenda – and for good reason. In the next decade, two monumental shifts will occur: 1) 77 million baby boomers will start drawing benefits and stop paying taxes, and 2) Social Security and Medicare will claim an increasing share of federal income tax revenues, reaching almost 30% by 2020 and more than 50% by 2030.

As we move toward Social Security reform, it is important to distinguish myth from reality:

Myth: The Social Security Trust Fund can pay benefits.

Facts: The Social Security Trust Fund is real but can't pay benefits. The trust fund is merely an accounting function the government uses to keep track of how much money the Treasury has collected from payroll taxes in the name of Social Security in surplus to what was actually needed in each year to pay benefits.

By law, all surplus funds are spent on other government programs or used to pay down general government debt. The trust fund is then credited with a non-negotiable bond which is then placed in a filing cabinet in the Bureau of the Public Debt building in Parkersburg, W.Va. The trust fund currently holds non-negotiable bonds worth $1.6 trillion.

Bonds owned by individuals and corporations were purchased in the marketplace (exchanged for cash). They can be resold in the marketplace to obtain cash. Bonds in the trust fund were not purchased in the market, nor can they be sold.

Therefore, the trust fund has very little to do with the government's actual ability to fund benefits.

If, for accounting purposes, you consider these pieces of paper ''assets,'' you must also note that they are Treasury ''liabilities.'' Summing over both agencies of government, assets plus liabilities net out to zero. If we could create value by typing up IOUs we write to ourselves, Social Security would have no financial problems. More than that, we could solve all the government's fiscal problems in that way.

Myth: The problems for Social Security are in the distant future.

Facts: The problems for the federal budget begin in 2018, when Social Security will officially go into debt on a cash-flow basis. This means the government will collect less in payroll taxes that year than it needs to fund benefits for that year. That's when the government taps the trust fund.

As it relates to the government's ability to fund benefits fully, the only thing that really matters is cash flow. Because Congress will no longer have the cash flow in 2018 to fund benefits as promised fully, it will have to start making difficult decisions about which taxes to raise and which programs to cut so money can be generated to redeem the bonds in the trust fund.

In 2018, Congress will have to find $10.6 billion (in 2004 dollars). By 2041, this will have grown to $123.9 billion. In all, Congress will need $2.3 trillion.

Myth: The funding problem is minor.

Facts: Social Security's debt gets larger over time and requires a long-term solution. Although the federal payroll tax currently pays for almost all Social Security and Medicare benefits, the shortfall will grow rapidly during the baby boomer retirement years.

For example, this year, for the first time in more than two decades, the combined deficit in Social Security and Medicare will require a net transfer from the Treasury equal to almost 4% of federal income tax revenues. That figure will double in the next five years and double again in the five years after that. By 2020, elderly entitlements will consume one-in-four income tax dollars, and by 2030, they will consume one of every two.

By mid-century, when today's college students retire, we will need three-fourths of all federal income taxes to pay their retirement benefits. Eventually, retirement benefits paid to the elderly will consume the entire federal budget, crowding out every other spending program.

Myth: Personal Retirement Accounts won't help.

Facts : Plans that set aside money today for the future have up-front costs but long-term benefits. Depending on how the reform is designed, a system that creates personal accounts can replace today's pay-as-you-go system with a fully funded system after one generation.

Niehsa Wolfe is Tennessee state leader of Team NCPA. Team NCPA is a special project of the Dallas-based think tank, the National Center for Public Analysis. Its goal is to educate the public about the need for and benefits of personal investment-based Social Security reform. Web site: