Huge returns needed to make up for cutback

(Okay, I know that I've only been posting shit that can be found elsewhere. But, I don't have time to revamp/rewrite a redistro. So, such as is it, you still need to know this shit is happening! And I am giving credit where credit is due....)

In promoting his plan to create personal accounts under Social Security, President Bush is giving ominous warnings that Social Security faces "bankruptcy down the road" and that "the crisis is here."

His plan would allow younger workers to invest a portion of their payroll taxes -- possibly 4 percentage points of the 12.4 percent employer-employee tax -- in stocks or other investments. But if investing this small portion at plausible market-rate returns for safe investments could actually save us from this "crisis," then there must not be much of a crisis.

In fact, Social Security is facing serious long-term problems, but personal accounts could actually make those problems worse.

Most of the new money going into Social Security goes right back out to pay current benefits. Any excess goes into the trust funds, effectively invested in U.S. government bonds at market rates of interest. But, it is projected that around 2018, after many Baby Boomers retire, all the new money and more will be needed to pay full promised benefits. As planned, the trust funds will then start redeeming those bonds to cover the difference.

The Social Security trustees project that around 2042, the trust funds will be exhausted and new payroll tax revenue will cover about 73 percent of promised benefits. The Congressional Budget Office, on the other hand, estimates that the trust funds will be depleted around 2052, and that payroll taxes will then cover about 80 percent of promised benefits.

There are a variety of ways that these long-term problems could be addressed. The sooner they are addressed, the less painful the solution will likely be.

But scary rhetoric is, at least, misleading. Medicare is in far worse shape than Social Security. Yet, instead of Bush proclaiming "crisis," his new drug benefit alone creates an additional, infinite-horizon unfunded liability of around $16 trillion. Moreover, the combination of our budget deficit and our trade deficit threaten a far greater crisis.

The Bush borrow-and-spend budget policies, coupled with huge tax cuts going far disproportionately to the wealthiest individuals, have mired the government in massive new debt. So, we might face a crisis when government needs to redeem those bonds held by the trust funds. But much of our potential crisis results from the fiscal irresponsibility of the Bush administration. Yet Bush would make those tax cuts permanent, while forcing us to borrow trillions more when tax money needed to pay already-promised benefits is diverted into personal accounts.

And, judging from the 2001 report of Bush's own commission, personal accounts wouldn't make up for the shortfalls described above.

The big unanswered question becomes: As you put tax dollars into your personal account, how much will be the cutback in your traditional benefit? A huge cutback in traditional benefits could make Social Security look solvent, but that would require astronomical returns on those personal accounts just to make up for the cutback.

So, why is the Bush administration promoting personal accounts? Consider these possibilities.

Many conservatives believe that it should not be the role of government to provide a safety net. Some view Social Security as a socialist Ponzi scheme. And personal accounts look like a good step toward ending it.

Wealthy investors would probably benefit from increased stock prices. (For smaller investors, the damage to the safety net would probably negate this benefit.)

The investment industry, major Bush contributors, would collect huge fees. This would reward them with a handsome "return" on their contributions.

Many Americans are already convinced of the crisis. There is polling data that suggests that among young people, more believe in UFOs than believe that they will ever collect benefits from Social Security. If you believe that you will likely receive little or nothing, major change is an easy sell.

And, for the Bush administration, this "crisis" offers the additional advantage of directing our attention away from any number of their other policies that are far more likely to result in actual crisis.

David Roberts teaches tax policy, including Social Security, at DePaul University.