The Washington Post

September 07, 2001, Friday, Final Edition

SECTION: EDITORIAL; Pg. A29

Social Security: Hard Realities . . .

by Steven Rattner

New budget figures from the Bush administration and the Congressional Budget Office have set off fresh chattering about the state of Social Security and Medicare. Hooray for such heightened sensitivity to these two important programs.

But the focus on whether the Social Security trust fund will be invaded by $ 9 billion, as CBO projects -- unambiguously a Bad Thing -- risks distracting the public from a much more important problem. As matters now stand, far from paying off the national debt, as President Bush has promised, we will be incurring trillions of dollars in new debt in the coming decade and beyond to meet the commitments of Social Security and Medicare. It's hard to blame the public for being confused when the accounting policies are so misleading and when the dramatis personae keep changing their messages.

Since its bold unveiling in President Clinton's 1998 State of the Union speech, the Democratic mantra has been "Save Social Security First." Earlier this year, it was wheeled out -- unsuccessfully -- to beat back the Bush tax cut. But last month, to avoid giving life to the forces of privatization, Democrats suddenly attacked President Bush's Social Security Commission for excessive pessimism about the state of Social Security, only to revert to the "Social Security is in a crisis" mode when mid-year budget figures popped out.

For their part, the Republicans have been equally determined to avoid consistency. They've played the crisis card when promoting the privatization agenda, while arguing that fears for Social Security are overstated when pushing tax cuts.

Fresh from the commission's alarmist report in July, the administration pirouetted to pooh-pooh the notion that the budget revisions threaten our two most important entitlement programs.

In fact, you don't have to be a Bush supporter to agree with the commission's view that Social Security is a larger drag on our future prosperity than most Americans comprehend. You don't have to be a Democrat to believe that the new budget figures confirm that the tax cut exacerbates the challenge of dealing with Social Security, although the tax cut is only a part of the challenge to paying promised Social Security and Medicare benefits.

The focus on the sanctity of the trust fund comes in part because of the way President Clinton chose to frame the issue, implying that if we religiously place the Social Security and Medicare surpluses in a "lockbox," we needn't worry.

Totally false. First, all that's in the lockbox is a pile of government IOUs. When baby boomers start retiring, each year's Social Security won't be enough to pay each year's benefits. So to pay benefits, those IOUs will get turned in, beginning in 2016 or thereabouts. Washington will have to come up with the cash, meaning more borrowing.

Second, by around 2038, those IOUs will run out, because however high payroll taxes seem to us, they aren't nearly high enough to pay the benefits promised. Lots more borrowing will be needed to amass the needed cash.

The result: Rather than shrinking, our national debt is still growing every year. At the end of the decade, it will be around $6 trillion. By 2075, we will have over $ 47 trillion of debt, according to the Bush Commission's calculations.

Politicians have dodged the truth on this issue in large part because the surest ways to bring true solvency to these programs are so unappealing: higher taxes, lower benefits, cuts in other government spending. We need to confront these these harsh realities, but let's start with two less Draconian policy changes.

First, we should return to the pre-1969 system of separating the accounts of the benefit programs from those of the rest of the federal government, as a commission headed by Alan Greenspan recommended in 1983. That's also how companies keep their books.

We can still look at the two sets of accounts together to understand the macroeconomic effects of fiscal policy -- which is why they were combined in 1969 -- but the more important analysis today is to understand the impact of tax cuts and spending programs on the inheritance we are leaving our children.

This seemingly small change would make clear our national debt is in fact rising today and will continue to rise relentlessly. And even the financially unsophisticated would understand that there is no surplus. That might bring Congress to heel on new spending and help convince the Bush administration we can't afford its tax cut.

More important, we need to allow the Social Security and other benefit programs to do what virtually every other pension fund in America does, including those of the states, Congress and the Federal Reserve itself: Invest in securities other than Treasury bonds. In fact, more than 25 percent of American equities are already owned by pension funds, at least half of that by government funds.

The higher returns earned by stocks and corporate bonds would help close the Social Security funding gap. Opponents, including Alan Greenspan, believe direct government ownership of shares suggests creeping socialism. But there's no reason these trust funds can't buy a basket of stocks that mirrors the broad market indexes and agree to vote those shares in proportion to other shareholders, thereby neutralizing economic or political effects.

In 1998 President Clinton floated the idea of investing a small part of the trust funds directly into equities; Republicans howled and pushed individual accounts, which Democrats have in turn been decrying as jeopardizing the retirement of millions of Americans.

While individual retirement accounts raise many questions -- fairness, risk and administrative costs come to mind -- constructive suggestions have been made for addressing these valid concerns. Given the gravity of the crisis, the accounts certainly deserve a closer look.

Meanwhile, both sides need to forswear the demagoguery. We need to devote less of our attention to the $ 9 billion of trees and more to the trillions of dollars of forest.

The writer is managing principal of Quadrangle Group LLC, a private investment firm.