One Person's Opinion

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Tuesday, December 21, 2004
1. Despite what Republicans say, it's impossible to avoid the transition costs caused by the switch to a system of personal accounts. The fact of the matter is that the money to be collected in the next 20 years in payroll taxes is committed to pay the benefits of retirees during that period. That is how the system works. Divert those payroll taxes, or some part of them, to private accounts and you create a shortfall that you have to make up with other governmental revenues.

There's a Republican talking point out there that disputes this, that says that there is no transition cost, but simply the "moving forward" of liabilities from the future into the present. Frankly, I do not understand this argument. Right now, current payroll taxes pay for current retirees. Future payroll taxes (and perhaps some general revenues to pay for shortfalls) will pay for future retirees. If you divert the payroll taxes, you now need another revenue source to pay for those future retirees. Either a spending cut or a tax increase will be needed to do it.

2. Personal accounts won't solve the Social Security crisis, if there is one. There is a big debate as to whether Social Security needs "fixing". However one wants to characterize it, the problem is that the class of retirees figures to increase in size (i.e., the baby boomers) while the class of workers figures to stay stagnant or decrease. Thus, there will be a smaller pool of payroll taxes to pay for a larger pool of retirees.

Everyone agrees that, in broad contours, that's the issue. So what the Republicans propose to do is dip into the pool of future payroll taxes that is supposed to pay for baby boomers' retirement, and use that money to pay for something else (essentially 401(k)'s for current workers). That, quite obviously, won't solve the problem; it will make it worse. The funny thing is that people don't see this. If Republicans proposed to take that money and use it to pay for a tax cut, or a war, or an elementary education program, everyone would understand that they were raiding Social Security. But because they are using it to pay for a program for a different set of future retirees, they are somehow able to pitch that diversion as "saving" Social Security.

Simply put, if there's a future shortfall of revenues, what the program needs is a larger revenue pool (such as a tax increase) or smaller payouts (i.e., benefit cuts, or means-testing, or raising the retirement age), or some combination of both.

Of course, the Republicans are the same party that thinks that it can balance the budget through huge tax cuts and spending increases, so I guess they are being consistent.

3. The problem with personal accounts is that they miss the point of Social Security. The purpose of the program is not the same as a private savings account. Social Security was conceived during the Depression-- when many people had lost a ton of money in the stock market (duh!). The purpose was to guarantee the elderly some minimal income, as a form of social insurance, to keep seniors out of poverty even if their savings was decimated, even if they lost their money in the stock market, even if life dealt them a bad hand. Social Security is not an investment program, but a form of social insurance. It also recognizes that poverty among the elderly can become a tremendous burden on relatives, friends, and society. To put it very cynically, we all have a strong interest in ensuring that senior citizens are not relying so much on the rest of us. Social Security also has a mild and proper redistributive function that rewards people for a lifetime of work, even in low paying jobs. Personal accounts can't accomplish that.

Bottom line-- personal accounts are a VERY bad idea.

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