Social Security under review Sam Says

Author: Sam Wilson

Since the State of the Union Address, President Bush has been traveling around the country to convince ordinary people and Congress that his plan for creating personal accounts in Social Security is the correct way to save the program.

After all, the Social Security Trust Fund will become bankrupt around 2042 if we do absolutely nothing between now and then. And, instead of a slight tax increase, mild benefit cut or combination of the two, the President reasons that personal accounts will fix the problem. The logic goes like this: today's workers, whose Social Security taxes pay for today's retirees, would be able to divert part of their Social Security tax into personal investment accounts. Those accounts would then generate so much more money than Social Security that benefits could be cut without anyone suffering from it. Sounds pretty nice, right?

Unfortunately, a few problems exist with this logic. The first is that it just does not work. Today's workers pay for today's retirees. That means that as soon as the workers start diverting their taxes away from Social Security and into personal accounts, the retirees have less money from which they would draw their benefits. This would mean that the Trust Fund would go bankrupt way before 2042, thus defeating the whole purpose of personal accounts in the first place.

But to counter this, the White House has been talking about the "transition costs." The transition cost is the amount of money Social Security will have to get from somewhere else to pay for the benefits of today's retirees. This would not be cheap. By the administration this would cost $758 million for only the first five years of the transition. In the long run, it will cost trillions. And all this money will, of course, simply come out of the deficit.

So, ignoring whether or not these personal accounts will actually yield a return greater than the Trust Fund, which is extremely uncertain itself, this plan cannot fix the solvency of the Trust Fund. It's simply a switcheroo. The Social Security taxes that would pay for benefits go to these personal accounts. The benefits are then paid for out of the deficit. It's a redirecting of tax money, nothing more.

The second problem with this logic is that for personal accounts to be desirable, they would have to produce a greater return than the Trust Fund. The Trust Fund is made up of U.S. Treasury Bonds, the safest investments in the world. While they do not offer instant wealth, they do offer a guaranteed return.

Other investments offer the possibility of a greater return, but without the security. The entire appeal of personal accounts rests on the assumption that these personal accounts will have a higher return than the Trust Fund, and will not crash. Risking the last line of retirement security on such an assumption is asinine.