Who Can Really Say?

Flesh Eating Social Security Bacteria

Via Instapundit, John Fund writes in the WSJ today of a new proposal to create personal social security accounts. But there's a problem with the plan.

The public is anxious about President Bush's reform of Social Security, and the idea is in trouble. Ceaseless pounding by liberals has driven many Republicans into a defensive crouch. It's time for some political jujitsu that will instead focus the public's attention on stopping Congress from spending the extra payroll taxes now flowing into Social Security on anything else. The only effective way to prevent that would be to take the money off the table by starting personal Social Security accounts for every American who wanted one.

That's why the White House should embrace an idea that three GOP senators will propose tomorrow. They want to seize back the moral and political offensive on the issue of personal accounts. By proposing the creation of personal "lockboxes" to ensure that the government can't raid Social Security taxes for other programs, they would force opponents to cast a vote against the idea that individuals should have ownership and control over some of their own retirement funds.

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In addition, if the personal accounts were limited to no-risk, but marketable, Treasury bills, the argument about the "scary and risky" stock market investment of payroll taxes would be neutralized. Converting the nonmarketable IOUs the government now holds into marketable Treasury bills issued to taxpayers would create an asset that individuals would own and be able to pass on to their heirs. If history is a guide, such risk-free Treasurys would earn an annual rate of return of between 2.5% and 3%--much better than Social Security will deliver. The surpluses would become real assets owned by citizens rather than government IOUs (or, more accurately, "I owe me's") piling up in a filing cabinet in West Virginia.

The problem? Well, what do you think the Treasury will do with the cash it raises from the sale of T-bills to lockbox holders? Anyone want to guess that the money will go to fund budget deficits, just as the SS surplus has all along? Don't get me wrong -- the holders of the T-bills will have a real interest in the money invested in the T-bills, as opposed to the present situation, in which taxpayers and beneficiears have no interest whatsoever in the SS IOU's. But that benefit doesn't outweigh the fact that we'll still be paying a flat tax on income that's used to pay for current expenditures.

The story also doesn't answer the question of how (if at all) the financial benefit to personal lockbox holders will be offset by reductions in SS benefits. After all, that's the point of collecting the surplus in the first place, no? That is, the point is to collect more than we need now so that we'll have more money available later to pay benefits, so these funds would have to in some form be used to reduce future benefits, right?

No answers yet, but I see this as a really clever, attractive band-aid. It'll look fine at the outset and indeed, it almost sounds like a real time "personal account". But the band-aid hides the fact that the wound is infected with flesh eating bacteria in the form of too few taxpayers paying for too many beneficiaries. Indeed, it's similar to the way FDR's original design of SS hid the fact that SS is a welfare program, not an insurance program.

Linked to the Beltway Traffic Jam.

Posted by Peter at June 20, 2005 05:46 PM