In an unexpected move, Treasury Secretary Lawrence Summers has decided to inject himself into the presidential campaign by attacking Texas Governor George W. Bush's proposal to save Social Security. While it is surprising for a senior cabinet official such as Summers to involve himself this way in a presidential campaign, it is the substance of his argument that is the most astonishing.
Like Vice President Gore, Summers' main line of criticism is that Bush is promising the same money to two different generations. This argument shows that they have a complete lack of understanding of how Social Security actually works. In Summers' case, he should know better. Gore's own plan not only would not solve the problem, it might actually make it worse.
Social Security is currently a pay-as-you-go system in which taxes taken from paychecks of today's workers pay the benefits of today's retirees. The first year Social Security paid benefits, in 1940, there were 42 workers for each retiree. Following the baby boom, people began to live longer and have fewer children. Now there are only about 3 workers for every retiree, and it will soon drop to about 2 to 1 – a huge and costly demographic shift.
Currently, the government receives more in payroll taxes than it needs to pay benefits. Yet the surplus money is not currently being saved, or otherwise put aside for future benefit payments. Instead, it is being spent on other government projects and government IOUs are given to the Social Security Trust Fund. By 2015, the demographic shift will create such an imbalance that workers' payroll taxes won't be enough to pay all Social Security benefits as promised. That is when the trust fund, which holds special government bonds, is supposed to make up the difference. It will have to redeem the IOUs from the Treasury. To pay the IOUs, the government must either raise taxes or borrow from the public. Barring that, benefits will have to be slashed.
Under the Bush proposal, younger workers would be allowed to invest a small portion of their payroll tax dollars in a personal account similar to an IRA. Initially, this money would come from the Social Security surplus – the amount currently collected but not needed to pay benefits.
When it comes time for younger workers to retire, they would be guaranteed a minimum benefit coming from a mixture of their personal account and a government Social Security check. Initially, this combined benefit would probably rely heavily on the government guarantee. The guarantee would come from the remainder of the payroll tax coming in. As workers' accounts grow, they will ease the government's burden and reduce the likelihood of a tax hike. In fact, FICA taxes might even be able to be cut. And, depending on how the program is eventually structured, individuals' accounts could generate a larger benefit than workers would otherwise receive.
These personal accounts would enable people who live paycheck to paycheck to accumulate, literally, hundreds of thousands of dollars by the time they retire. But don't just take my word for it, check out Internet sites like the NCPA's www.mysocialsecurity.org, which will allow you to see for yourself the difference between the current system and one under which your Social Security taxes had been invested in real assets.
Gore, ever the savvy campaigner, is trying to scare seniors, the generation most likely to show up to vote. Yet Gore himself would do nothing about the demographic dilemma facing Social Security. Instead, he would use current Social Security surpluses to pay down the national debt. But this is what the Treasury automatically does anyway. And the Treasury will still have to pay off the IOUs. With what? Higher taxes from us, of course.
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