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Guest Opinion
Social Security: Greater Returns For Whom?
By David J. Roberts
Associate Professor of Accountancy, DePaul University
(Mr. Roberts teaches tax policy)
Jan. 18, 2005 -
In the debate over whether we should add personal
accounts to Social Security, proponents have long argued that higher
returns on investments through personal accounts are needed to save
Social Security. But the whole concept of "returns" in a social
insurance program like Social Security is deceivingly complex.
Most of the tax money going into Social Security
goes right back out to pay benefits. There is little investment upon
which to have any return. Any excess goes into the trust funds and is
loaned to the government at market rates for U.S. Government bonds.
This excess could conceivably be invested elsewhere
at higher returns, with commensurately greater risk. But this excess
will be disappearing. It is projected that around 2018, all of the new
tax money and more--to be generated from trust fund bond
redemptions--will be needed to pay full current benefits. According to
two official projections, Social Security will be able to pay full
scheduled benefits for either 37 or 47 years, with significant partial
benefits thereafter.
Social Security faces serious long-term problems.
But this is hardly the "crisis" that President Bush has proclaimed.
There are a variety of ways of addressing these problems. Moreover,
judging from the 2001 report of Bush's own commission, personal accounts
won't solve the problems except with drastic cuts in scheduled benefits
and infusions of trillions of dollars.
Diverting a portion of new money into personal
accounts would drastically accelerate the projected shortfall and
threaten benefit payments. And since Bush has ruled out a payroll tax
increase, government would have to borrow trillions of additional
dollars over the years (perhaps two trillion in just the first 10 years)
if it is going to pay already-promised benefits. Moreover, government's
overall cost of capital could increase as the trust funds stop being, in
effect, a captive lender.
So, while some personal account investments might
have higher returns, government would face increased borrowing costs to
be paid by the taxpayers. And astronomical new government borrowing,
even coupled with promised cuts in government's benefit costs for the
distant future, would likely drive up interest rates throughout the
economy. This could seriously damage the economy and hurt the returns on
stock investments both inside and outside of personal accounts.
Proponents of personal accounts often compare the
returns on tax dollars put into Social Security with hypothetical
returns on those same dollars invested in the stock market. It would be
hard to find a more meaningless comparison.
Most of your tax dollars are used to pay benefits
to current recipients. If you instead invest them in the stock market,
you might have a bundle, but where would the money come from to pay
those current benefits? Your returns would come at the expense of those
who've already paid in. So much for their security. Those stock returns
are drastically overstated because they ignore the cost--perhaps through
increased taxes--of providing a replacement benefit to those who would
otherwise lose their benefits.
Social Security was never intended to make anybody
rich; it was intended to keep us from being poor. And it has been
remarkably successful in keeping participants out of poverty. Moreover,
by providing a safety net, it enables us take greater risks in order to
create personal wealth, leading to higher returns outside of Social
Security.
Social Security provides a secure,
inflation-adjusted old-age benefit that you cannot outlive. For some who
live to very old age, the returns are significant. One could outlive or
lose a stock market nest egg. But Social Security benefits keep on
coming.
Social Security also provides survivor and
disability benefits. When critics talk about "return," they invariably
ignore the tremendous value of the survivor and disability coverage that
has proven to be a lifesaver for so many families when a breadwinner has
died or become disabled.
Social Security provides disproportionately large
benefits to lower-income workers, paid for through the tax dollars of
higher-income workers. Again, the goal is for nobody to be poor. This
subsidy makes perfect sense for a social safety net, but little sense in
an investment program.
With all the focus on higher returns, the critical
unspoken detail involves the amount of cutback in traditional benefits
when tax dollars go into personal accounts. Personal accounts coupled
with severe cuts in traditional benefits could make Social Security look
solvent. But that would require tremendous returns on those personal
accounts just to equal the previous scheduled benefits.
Those who think they would be better off with
personal accounts would probably be sorely disappointed. Yet some
supporters would benefit greatly.
For example, the investment industry would generate
huge fees. Wealthy investors would probably benefit initially as new
interest in the stock market drives up stock prices (but for smaller
investors, this benefit would probably be negated by the decline in
traditional Social Security benefits).
Conservatives who want to end the social safety net
and create a budget crunch to force cuts in other government programs
would be off to a good start. And Republicans may find many new
supporters, as these new investors become sympathetic to policies that
favor the interests of corporations. So, for many major Bush
contributors, personal accounts should provide tremendous "returns" on
their political contributions.
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