There is an old rule in politics that you can't successfully beat a plan with no plan. That doesn't mean opponents of reforming Social Security aren't trying, however.
The President's bipartisan Commission to Strengthen Social Security released its interim report on the financial troubles facing our nation's retirement system. Yet before most of the 16 commissioners even read the staff's draft copy, the usual collection of Democratic Party "leaders" and liberal activists sprinted to the nearest microphone to blast the report as an attempt to "scare" people into thinking there is a crisis in order to pave the way for privatization.
The commission's interim report seeks provide some context and reasoning to the American people for their efforts to come, by clearly laying out the basic problems confronting Social Security. While the problems are familiar to those of us who have studied the issue for many years, it probably came as news to many. In a nutshell the problem is demographics. Today's Social Security benefits are paid for by today's payroll taxes. As the nation's population ages, with people living longer and having fewer kids, the taxes we collect will at some point no longer be enough to cover all the benefits we are promising.
Part of the dispute has been about when that will start to matter. Will it be in 2016, just 15 years from today, when costs will first exceed tax collections (at the current rates) and we have to start redeeming the government bonds held by Social Security trust fund? Or will it be 2038, when the trust fund runs out of bonds?
This usually boils down to a debate over whether the bonds held by the Trust Fund – IOUs from one part of the government to another – should be regarded as "real" or merely a bookkeeping gimmick. Critics of the commission's report say these bonds are every bit as real as the bonds sold to the public – "They are backed by the full faith and credit of the federal government," they exclaim.
Even if you agree with that argument, what exactly does it mean? It simply means that the government "really means it" when it promises to redeem the bonds. But that doesn't change the fact that Uncle Sam must still come up with the money to do so. And by 2016, when it'll be necessary to start cashing in the bonds, the trust fund will hold IOUs worth over $5 trillion. To put that in perspective, the entire federal budget for this year was only about $2 trillion.
Since the government doesn't save anything or generate any real wealth on its own, that means it must: lower its obligations by reducing benefits, increase its revenues by increasing payroll taxes, or increase its future overall obligations (debt) by selling other bonds on the open market at unprecedented levels. Therefore proponents of maintaining the status quo are really supporters of doing one of those three things, or some combination of the three.
That would be troublesome enough if finding the $5 trillion were the end of the matter – it's not. Paying the trust fund off only gets us to 2038. As long as the government continues to promise workers benefits upon retirement, the government will continue to need to raise payroll taxes or increase public debt exponentially.
There is a way out that doesn't involve the economic problems associated with the others. That is to find some way to invest the Social Security surplus in real assets that might grow in value over time. That's precisely what the commission is charged with doing.
Opponents of investing this surplus money through personal retirement accounts claim that to do so would result in benefit cuts. Nonsense. Not reforming the system will lead to benefit cuts, not the other way around. It's true that the government's share or obligation for benefits will be reduced, but to say this means benefits will be cut is to ignore the fact that these personal retirement accounts will hold real money and will become part of an overall Social Security benefit package.
And since the commission has yet to develop a proposal for this new Social Security system, the debate should be limited to the question at hand: Is the commission trying to scare us with a false crisis? The answer is clearly no. The commission is merely bringing us the bad news: there is a crisis. Whether you want to be scared is up to you, but you shouldn't kill the messenger.