National Review

September 3, 2001

Article; Vol. LIII, No. 17

Untrustworthy: The Democrats on Social Security reform

BY RAMESH PONNURU

For Social Security reformers, the good news is how quickly the public has moved forward. People have become more receptive to the idea of investing some of their Social Security payments themselves. Exit polls from the 2000 election found that 57 percent of voters supported that reform. The bear market has cut that support, but only a little. The bad news, though, is that reform is going to have to win the backing of a significant number of congressional Democrats to get enacted. And the Democrats-even their best and brightest-are moving backward.

Most liberals have never supported a free-market overhaul of Social Security. In the past, though, many of them were at least willing to concede that the program was ailing. Reining in entitlements was even something of a goodliberal cause, especially as liberals worried that runaway spending for the elderly was crowding out other federal programs they wanted.

Then two things happened. First, liberals lost political power-and it became clear that much of their remaining power derived from the popularity of federal entitlements. President Clinton came back from the irrelevance to which the 1994 elections had seemingly consigned him by depicting Republicans as a threat to Medicare. Second, conservatives began to dominate the debate over how to solve Social Security's problems. As the prospect of a reform based on personal investment has drawn nearer, liberals have started digging in their heels.

The Democrats' resistance to reform, and the lengths to which their court economists will go to rationalize that resistance, was on exhibit in July, when President Bush's commission on Social Security released the draft of its preliminary report. Alan Blinder, a Clinton appointee to the Federal Reserve and an adviser to Al Gore last year, told the Washington Post that the report "tries to create a sense of crisis when there isn't a crisis." He added, "It is irresponsible to frighten people." Robert Matsui, a Democratic congressman from California, said that the commission should be disbanded.

New York Times columnist Paul Krugman met his readers' expectations by being the shrillest of the report's critics: He called it "sheer, mean-spirited nonsense." Lest anyone miss his point-to judge from his repetitiveness, this appears to be a constant fear of Krugman's-his next column called the report "biased, internally inconsistent and intellectually dishonest." Blinder joined three other heavyweight liberal economists-Henry Aaron, Alicia Munnell, and Peter Orszagto issue a report of their own, which reached the same conclusions without Krugman's table-pounding.

One of the commission's conclusions exercised the liberals more than any other: the claim that the existence of a "Social Security Trust Fund" does nothing to improve the program's solvency. The issue may seem arcane, but it is in fact decisive, so bear with me for a minute. For about two decades, the payroll taxes that fund Social Security have brought in more revenues than the program spends on benefits. Until 1999, those excess funds were used to finance the rest of the federal budget. Now that the rest of the budget is in surplus as well, the excess revenues are used to pay down the federal debt. But however the money has been used-to spend on other programs or to pay off debt-the Treasury has always borrowed it from Social Security and, in return, credited the program with bonds. These Treasury bonds make up the Social Security Trust Fund.

Because the number of retirees keeps rising, it is projected that by 2016 the payroll tax will no longer bring in surplus revenues. By then, the trust fund should have accumulated bonds worth more than $3 trillion (in today's dollars). From then on, Social Security will have to draw on the trust fund to keep paying benefits. It will keep drawing on it until 2038, when the trust fund will finally run out.

So there's no problem until then, right? Wrong. What the president's commission points out is that the bonds are "not accumulated reserves of wealth but only promises that future taxpayers will be asked to redeem." It concludes, "The Trust Fund can neither delay the need for new resources by a day nor reduce the need by a dollar."

It is this point that leaves the liberals sputtering. The bonds in the trust fund are "legally backed by the full faith and credit of the U.S. government," note Henry Aaron & Co. "Social Security's bonds are just as 'real' as the Treasury bonds held by private investors. The fact that these bonds are 'paper' assets does not in any way reduce their value." It is "dangerous" to suggest otherwise. Krugman argues that nobody would deny that the trust fund held real assets if it were full of German bonds, and that it is therefore absurd to suggest that it doesn't because it holds American ones.

These people are all smart, but their argument is stupid. If you've loaned money to someone else, you can look forward to getting that money back (with interest) to pay for something. If you've loaned money to yourself, you can't. Is that really so hard to understand? The commission isn't questioning that the government will repay the bonds; it's pointing out that repaying the bonds will require the government to raise taxes, cut spending, or both. It doesn't matter if the trust fund has $3 trillion in bonds or $300 trillion-paying for Social Security is going to start being a problem in 2016.

In tandem with their argument about the bonds, the liberal economists make a second point that is not ridiculous. Their reasoning: The trust fund represents years of surplus revenues from Social Security. Those revenues reduced the budget deficit for years, and now they are reducing the federal debt. Thus they have been adding to national saving, which contributes to economic growth, which in turn makes it easier to pay for future Social Security benefits.

This argument has the merit of not pretending that the bonds will somehow pay themselves back after 2016. (It just skates by the question of how to pay for them.) But it has several weaknesses. There is, for one thing, substantial dispute over how much deficits hurt the economy or debt repayment helps it. Stronger economic growth, in addition, does not make it much easier to pay for Social Security. As the commission report explains, the program's benefit levels are tied to wages. The stronger economic growth is, the higher wages, and therefore benefits, are.

In addition, whether excess payroll-tax revenues have really improved the federal government's finances is highly questionable. It is at least as plausible to think that for most of the last two decades, the influx of these revenues to Washington simply led Congress to spend more. Only in the last couple of years has a political taboo against "raiding the Social Security surplus" made it impossible to spend the extra money. If the Social Security surplus was spent from 1983 to 1999, in no sense do most of the bonds in the trust fund represent increased national saving. (The four liberal economists' report raises this possibility only to dismiss it.)

What's suspicious about the Democratic intellectuals' attack on Social Security reform is that everyone involved in it used to show greater understanding of the issues. In January 1999, Henry Aaron testified before the Senate Budget Committee that the trust fund "may have failed in adding to national saving, if [it] caused government to run larger deficits or smaller surpluses on the rest of its activities." (If so, he added, this was the fault of "unwise fiscal policy outside Social Security" rather than of the trust fund-a point that gets us nowhere.)

Peter Orszag said, in testimony before a House subcommittee last year, that the trust fund may not have increased saving-at least until the advent in 1999 of the "lockbox" to protect the Social Security surplus. In 1984, Alicia Munnell co-wrote an article for the New England Economic Review citing "the improbability that Social Security surpluses will increase national saving" in arguing that the surplus should be reduced. The authors wrote that their "best guess [was] that the scheduled buildup of assets in the Social Security trust funds over the next 35 years would be used to offset deficits elsewhere in the federal budget and thus would contribute little to overall saving and capital accumulation."

Krugman, too, has made an about-face. In 1988 he was careful to mention that Social Security surpluses would help finance the program's future only if they were "not offset by deficits in the remainder of the federal budget." Now he doesn't even acknowledge the possibility that this may have happened.

It's not just liberal economists who have forgotten what they used to know. Robert Matsui, the Democratic congressman, has led the charge on the Hill against the commission. In July, he said: "This report falsely asserts that the Social Security system will be unable to meet its obligations because the assets held by the Trust Fund are 'not real.'

To the contrary, the Government bonds held by Social Security are as real and valuable as the Treasury bonds held by millions of private investors." These comments, of course, follow the economists' current analysis.

In 1990, however, Matsui and Democratic senator Bob Graham wrote an op-ed for the Washington Times that described the trust fund in terms more slighting than anything the commission has said: "Bluntly put, the federal government is spending more than $1 billion a week of the Social Security surplus as though it were general revenues.

All that the Trust Fund gets for these expenditures are chits from the U.S. Treasury." The fund was merely "a vault full of Treasury Department IOUs."

Tom Daschle and Dick Gephardt were clear-eyed in the past, too. In 1996, journalist Robert Novak grilled Daschle about the trust fund and got him to admit that "there is no such fund per se." In 1990, Gephardt said that by 2015 or so taxes would have to be increased to pay off the bonds in the trust fund. Now, Gephardt is accusing the commission of trying to "scare people" by questioning the value of the trust fund.

Better to scare people, perhaps, than to lull them into false complacency. By treating the trust fund as a way of paying for Social Security's obligations after 2016, the gang of four economists is able to say that the program's remaining shortfall is only 1.86 percent of wages that are subject to taxation. The clear implication: Raise payroll taxes by less than 2 percent, and the problem disappears for at least 75 years. But that implication, as we have seen, is false: It ignores the need to raise enough money to pay off more than $3 trillion worth of bonds.

Having labored to make the current system look more sustainable than it is, the gang of four goes on to stack the deck against personal accounts as a component of a solution. They estimate, incredibly, that allowing people to invest 2 percent of their wages would "divert" so much money from Social Security that young people would get 50 percent lower benefits. (Okay, class: Raise your hand if you think President Bush is going to propose a 50 percent cut in benefits.) It takes two statistical maneuvers to yield this daunting figure. First, they refuse to count the personal accounts as part of the benefits-a refusal that makes the reduction look at least 30 points greater than it should.

Second, they don't stop at estimating the cuts in benefits from the old system that would be required to make room for personal accounts. They add in all the cuts it would take to completely eliminate Social Security's pre-existing funding shortfall. The current program's funding problem, in other words, is attributed to the proposed reform of it. They're using a double standard. A hypothetical reform plan has to pass the most stringent of tests. But the gang of four argues at length that the unreformed Social Security system should be evaluated not on the basis of the benefits it can pay for, but of the benefits it has promised.

What was it that Paul Krugman said about intellectual dishonesty?