Social Security: Dispatch from fantasy island

Privateers continue their free-lunch fairy tale

July 30, 2005

With all the heat of a humid Washington summer concentrated -- rightly -- on Iraq, Rove, the economy, and the Supreme Court, Social Security has largely fallen off the radar. The Republicans' obsession with privatizing the retirement system has been a total flop with the public, despite an aggressive disinformation campaign. But though they seem defeated, they haven't given up -- Privateers plan on pushing through legislation later this year, perhaps when nobody is looking.

So it's worth reviewing the most important points we have made in the past.

• Social Security is not in crisis. The projections that show a deficit in 40 or 50 years are based on setting our future economic growth at a lousy 1.8% for the next 75 years. As we wrote: "Our economy has never had so low a rate for any 15-year period, not even if we include the Great Depression. We've had 3.5% growth over the last 75 years, and if the next 75 gives us 2.2% (just half of the growth in 2004), the Trust Fund will never run out. Even a brief period of healthy growth would be enough to make the Trust Fund last beyond the baby boom generation. The only shortfall comes if the next 75 years holds such a dire economy."

• But even if that comes true, benefits will still be higher for future retirees than they are today. Rock the Vote has a flash video called "Don't get played" that explains this. Do nothing, and benefits will be cut automatically by 20-30% from promised levels -- but they would still be higher than they are today, in real dollars.

• There is no free lunch. Any privatization plan will actually add to the debt, because when you take money away from the traditional system to put into private accounts, the traditional system has less money to pay current retirees' benefits. This is called the gap, or "transition costs" -- it's money we have to borrow now to pay for both the accounts for future retirees and benefits for current retirees. The supposed "savings" only come a generation later, but even then you haven't saved anything at all -- you're paying less, but you're taking less in as well. That's why, as the president has admitted, privatization does nothing to help Social Security's solvency; in fact, it makes it worse.

• And even if you decided you wanted to privatize anyway, now would be the absolutely worst time to do it. The Baby Boom generation will soon be retiring, and we've been planning for more than twenty years for the crunch. We've saved every penny we can in the trust fund, and we'll need all the rest as well. What kind of fool would shift funding away from paying benefits at the very time in history when we have the most retirees to pay? The "transition costs" would be higher than at any other moment. At least wait until after the bulge passes.

Over the last half year, Privateers have been repeating the same tired old lines. This last month has been no different.

MYTH: There is a free lunch!

The Congressional Democrats and liberal media outlets have stonewalled fixing Social Security by smearing the optional personal retirement accounts proposal. They continue to offer no solution other than raising taxes and reducing benefits. Unfortunately, too many people are falling for their empty rhetoric.

-- Herman Cain, "Setting the eagle free," Town Hall, 7/26/05

With Social Security, liberals oppose personal accounts and progressive indexing. The only liberal idea introduced this year is Rep. Robert Wexler’s plan to increase taxes. There’s an idea that’s never failed in the past.

-- Rich Tucker, "Money can't buy you safety," Town Hall, 7/15/05

[Wisconsin Republican Rep. Paul] Ryan reported that Rep. Bill Thomas of California, the powerful, secretive chairman of the House Ways and Means Committee, had agreed this year's Social Security reform should contain neither tax increases nor benefit cuts. That evoked a sigh of relief among Republicans who have -- without much help from the Bush Administration -- come up with a Social Security plan that establishes personal accounts and ends siphoning payroll tax revenue into general use by the government.

-- Bob Novak, "GOP: No austerity," Town Hall, 7/18/05

A coalition of House and Senate Republicans has transformed the Social Security debate with a new proposal that finally focuses reform on the personal accounts and sets aside all tax increases and benefit cuts. Skeptics take note: This bill can really pass. Nothing else can.

-- Peter Ferrara, "Stop the raid," Washington Times, 7/13/05

REALITY

Under President Bush, the Republican Congress has proven that when it comes to managing money, they simply have no clue how it works -- witness surpluses turning into unbelievable deficits. How did that happen? they ask, astonished. It's simple -- you're spending more money than you're taking in in taxes.

So it's no surprise that when it comes to the hypothetical deficit in Social Security, Republican Privateers have the same mental block. Their instincts tell them they ought to give people more, and cut taxes at the same time. Brilliant! If only it weren't a complete and utter fairy tale.

Here's a statement so obvious that nobody bothers to say it: When you're faced with a deficit, in any budget, you either have to increase revenue or decrease expenditures. Duh! Democrats have been saying this from day one, which is why they weren't invited to the fairy-tale island of the Privateers.

How does privatization affect the deficit? It diverts money from the traditional system -- decreasing revenue -- while maintaining expenditures for the current generation. Only for the following generation will traditional benefits be lowered, by the same amount revenue goes down. That's the gap, or "transition costs."

So in the end, revenue and expenditures are decreased by the same amount -- a wash. But first, there is a generation's worth of lost revenue.

In the real world, this obviously makes the deficit worse. But on Privateer island, this is somehow the only "solution."

MYTH: Ze plan! Ze plan! Liberals "just say no" to reform

With Congress ready to start the legislative phase of Social Security reform in the next few weeks, there are signs the Democrats' "just say no" approach may backfire. Even The Washington Post, no bastion of support for the current occupant of the White House, wrote a recent editorial called "Where Are the Democrats?" asking why the loyal opposition has no Social Security plan of its own.

-- Gary Andres, "Strengthen Social Security," Washington Times, 7/5/05

As we get closer to the year Social Security will pay out more than it receives in revenues, the cage around our economic eagle gets tighter. Congressional Democrats continue to say there is no crisis ...

The Congressional Democrats and liberal media outlets have stonewalled fixing Social Security by smearing the optional personal retirement accounts proposal. They continue to offer no solution other than raising taxes and reducing benefits. Unfortunately, too many people are falling for their empty rhetoric.

-- Herman Cain, "Setting the eagle free," Town Hall, 7/26/05

Sadly, liberal lawmakers refuse to introduce any reform plans of their own. "The minute we introduce a plan, we have to solve the problem," a senior Democratic aide told Bai. “We are the minority party. It’s not our job to fix things.” In other words, if it’s successful, "framing" will insure that nothing gets done. Not only will the president’s plans be blocked, but any potential liberal solutions will be sidelined as well. Some victory. ...

On the left, the rhetoric actually creates the policy. And since the rhetoric is designed to do nothing, the policy is to do nothing. No wonder they have no solutions to offer.

-- Rich Tucker, "A show about nothing," Town Hall, 7/23/05

With Social Security, liberals oppose personal accounts and progressive indexing. The only liberal idea introduced this year is Rep. Robert Wexler’s plan to increase taxes. There’s an idea that’s never failed in the past.

[Later in same article ...] Defeating terrorism will be difficult, but it is possible. And it must be accomplished without spending billions more in a futile attempt to "do something."

-- Rich Tucker, "Money can't buy you safety," Town Hall, 7/15/05

REALITY

Everybody knows the president's plan is "personal retirement accounts." But let's not forget the Democrats' plan, a fundamentally different one -- workers' payroll taxes go towards current retirees, and when those workers retire, their benefits are paid by the next generation of workers. We introduced that almost eight decades ago, and it's worked pretty damn well since.

That's not to say it doesn't need adjustment from time to time. For example, the bipartisan Greenspan Commission of 1983 instituted partial prefunding to anticipate the strain of the pay-as-you-go system when the Baby Boom generation retires. Since then, we've saved trillions in the trust fund for that purpose.

And while there is no crisis -- even if the dire projections come true, "shortfall" benefits will still be higher than today, in real terms -- we aren't opposed to "shoring it up" now, as Al Gore would say. As Josh Marshall wrote back in March, "Democrats have a plan for solvency. And everyone has a fairly clear idea what it would be. It'd be something along the lines of Bob Ball's or the Orszag/Diamond plan, a mix of tax increases and benefit cuts to bring the numbers into line -- something that would not require particularly drastic moves on either side." In other words, the only reality-based way to address the presumed deficit.

But Republicans want to keep playing on Privateer island, making up nuttier and nuttier ways to put the system in worse shape -- all without realistically addressing solvency.

And as long as these fairy-tale captains control both houses of Congress, only a fool of a Democrat would bother to introduce a bill. Without Republican support -- and there won't be any -- it would of course fail, if it even got a vote. In the mean time, Republicans could chop it up in committee and spit out a PRA proposal under the same title, all while bashing the poor Democrat for his or her despicable responsibility.

MYTH: The DeMint plan "stops the raid"

A coalition of House and Senate Republicans has transformed the Social Security debate with a new proposal that finally focuses reform on the personal accounts and sets aside all tax increases and benefit cuts. Skeptics take note: This bill can really pass. Nothing else can....

The proposal is based on stopping Congress' longstanding raid of the Social Security trust funds. Each year, the short-term Social Security surplus is taken by Congress and spent on other government programs. Social Security gets back these little IOUs that say Congress will return the money if the program ever needs it to pay promised benefits. ...

-- Peter Ferrara, "Stop the raid," Washington Times, 7/13/05

[DeMint's plan] would transfer the current surplus of Social Security funds derived from the payroll tax into personal accounts for persons under 55 who do not opt out. At first, the personal accounts would be limited to negotiable Treasury bills, but they would be the permanent property of the beneficiary. Since the Social Security surplus now pays for other federal programs, Hunter would increase the federal deficit -- by $87 billion in the first year.

That is no real problem for conservatives, who correctly view a big deficit as a deterrent on runaway spending.

-- Bob Novak, "GOP: No austerity," Town Hall, 7/18/05

REALITY

We covered DeMint's ridiculous bill last month, but Privateers seem determined to keep it as their "secret weapon." It took a complete loon of a senator to propose it, and only a loon would vote for it. Let's briefly recall why.

First, the trust fund is not being "raided." This has been a favorite trope of our boy president, who trounces around talking about "worthless IOUs." In fact, the Treasury bonds in the trust fund are as real as the ones we sell to China. You can read our long and technical explanation, but here's the short version.

Since Social Security gets its own revenue from the payroll tax, and cuts its own checks to retirees, it operates on a separate budget from the so-called general fund that Congress puts out every year. Like you and I but on a larger scale, it keeps its money in a bank account. The account is the trust fund, and the bank is the U.S. Treasury. Every day, as checks are cut, the Treasury cashes in some of these securities. And as Social Security has been taking in a surplus, the account balance has been earning interest.

So we already know what will happen when Social Security gradually draws on the trust fund, as the Baby Boom generation begins to retire. Treasury will cash out the bonds, as it does every day. If the Treasury is short on cash, it will sell new bonds to the public -- again, a process that happens every day. We trade one kind of debt for another, without raising the national debt a penny, and Congress doesn't have to lift a finger.

Sound shockingly simple? Well, it is -- unless you've been tuning in to the Privateers' fantasy island show.

In reality, instead of "stopping the raid," DeMint's bill does the exact opposite -- it starts the raid. Under this plan, Congress takes the surplus out of the trust fund without giving any bonds in return -- i.e., just pretends it's not debt. Meanwhile, Congress creates a whole new bureaucracy to manage these new "private accounts" -- an extra trillion bucks altogether.

Of course, DeMint promises to pay the money back. He'll give you his scout's honor -- but he won't give you any Treasury bonds, the Constitutionally-backed debt souvenir we've been using for over two centuries.

And does it "reign in spending"? Not on your life. There's nothing stopping Congress from borrowing the same amount it always does. They don't even have to increase the national debt limit, since they withheld the same amount in intergovernmental bonds. Why would this "free money" approach psych out Congress at all?

It's so stupid, this loony senator was laughed off the mainland. Unfortunately, Congressional leadership has decided to join him on his island of make-believe.