At long last, we are finally starting to get some meaningful details about President Bush's Social Security reform proposal. Inevitably, this is already starting to change the debate on this issue. Up until now, all we have heard is that Bush wants to establish some sort of private accounts as part of Social Security. But we have heard nothing about how such accounts do anything to solve Social Security's long-term financing problems.
Obviously, private accounts per se accomplish nothing unless accompanied by some reduction in future benefits for those with the accounts. Indeed, without benefit cuts, the creation of private accounts will worsen Social Security's financial woes because the Bush plan contemplates diverting Social Security taxes into the accounts.
I have heard more than a few people discuss Social Security reform as if the private accounts will magically fix Social Security without any necessity of reducing benefits. Indeed, they are adamant that there not be any cut in benefits whatsoever, now or any time in the future.
Obviously, such a position is ludicrous. The whole point of creating private accounts has always been as part of a trade-off. Workers would lose future Social Security benefits, which is what stabilizes the system's finances, and the income earned on the accounts will compensate them for this loss.
In order to induce people to make this trade-off, Bush strongly emphasizes that the status quo is unsustainable in the long run. He points often to the fact that the Social Security trust fund will be exhausted in the year 2042. At that point, current projected revenues from the payroll tax will only cover about 75 percent of promised benefits. The implication is that benefits will either have to be cut across the board by 25 percent or the payroll tax rate will have to rise by about 4 percentage points.
In other words, reforming Social Security now is less risky than doing nothing, as Democrats favor. When they scare people with benefit cuts, Democrats are in effect promising something that cannot be delivered. As many workers have discovered in recent years, bankruptcy of private businesses often leads to a loss of pension benefits.
What is always left out of this scenario is that the Social Security tax begins falling as a net contributor to federal revenues in 2008, when the surplus of Social Security taxes over benefits will peak at 0.8 percent of the gross domestic product. After that, this figure gradually falls to zero in 2018 and becomes negative thereafter. By 2045, the shortfall between Social Security taxes and benefits will equal 1.7 percent of GDP.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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