Editorials and Opinion Pieces

Social Security Shell Game

BY: Peter Ferrara, special to the Washington Times
DATE: January 29, 1999
SECTION: PART A; COMMENTARY; Pg. A18
LENGTH: 872 words

President Clinton's rhetoric about Social Security has everyone talking glibly about using the budget surplus to "save" the program. But what exactly does that mean?

We now know what President Clinton means by it. He has proposed to take the unprecedented step of financing Social Security from general revenues. Under his proposed plan, all payroll tax revenues would continue to be credited to the Social Security trust fund. But the government would also use 62 percent of the total budget surplus to buy government bonds on the ope nmarket, to be held by the Social Security trust funds. When the government needed the money to pay Social Security benefits in the future, those bonds would be sold on the open market again, reducing national savings, or they would be redeemed by the federal government in cash from the taxpayers.

In this process, general revenues, beyond Social Security payroll tax revenues, are used to buy the extra bonds in the first place, which are then given to the Social Security trust funds. Few seem to understand what a drastic and fundamental change this would be for Social Security.

Up until now, Social Security has been financed by the payroll tax, not by general revenues. This limits the program only to spending current payroll tax revenues, or the amount of past payroll tax revenues plus interest credited to the trust funds (in addition to revenue from the taxation of Social Security benefits).

But if general revenues can be used at any time to buy bonds to be given to Social Security, there is no limitation on Social Security spending. Social Security would then have an open-ended claim on general taxpayer funds, in addition to payroll taxes. Every election would then be fought over spending even more on Social Security by drawing even more from general taxpayers. There would never be another tax cut again because it would give away funds the liberals would claim for a perpetually bigger and bigger Social Security. This is why conservatives have always been careful about preserving the original limitation that Social Security is to be financed by payroll taxes, not general revenues.

But liberals have always opposed general revenue financing of Social Security as well. Franklin Roosevelt recognized it was the link between payroll taxes and benefits that allowed Social Security to be called "social insurance" rather than welfare. Because of the payroll tax, workers believed they had paid for their own benefits and, therefore, were entitled to them. This was the key to the political success of Social Security.

If Social Security is now to be financed in part out of general revenues, then there can be no justification for paying such general taxpayer funds to those not in need. As a result, Social Security would eventually have to be means-tested. It would then have been changed into a welfare program. In this sense, Mr. Clinton's plan would destroy Social Security.

Republicans, therefore, must recognize they cannot in any way accept Mr. Clinton's plan to use general revenues to fund an otherwise ongoing Social Security program with no real change. They cannot set a precedent for an open-ended claim by Social Security on general taxpayers. That would be a travesty of the highest order.

There is only one way the general surplus can be acceptably used to save Social Security. That is to finance the transition to a system of personal investment accounts.

As workers use their payroll taxes in whole or in part to fund such accounts, the government would then make up the lost revenue for Social Security from the surplus, as well as other possible sources, in order to keep paying benefits in Social Security's pay-as-you-go system. In this process, the new system would eventually replace the current Social Security framework, and general revenues would not be used to fund an ongoing Social Security system creating the above problems.

Even in the remote case where a significant number of workers continually chose Social Security over the personal accounts, after the transition the system would go back to financing their benefits on a pay-as-you-go basis out of payroll taxes rather than general revenues.

Republicans should not be shy now about proposing a personal account option for at least part of Social Security rather than adopting Mr. Clinton's plan. Poll after poll after poll shows two-thirds to three-fourths of the American people support such an option.

Moreover, such reform is sweeping the world. Eight countries in Latin America now have a personal investment account option. In Europe, Great Britain has been followed by Hungary and Poland, and even socialist Sweden started a private option for part of its system last July. But the Swedes are pikers compared to the supposedly Red Chinese, where workers pay half their retirement money into investment accounts. Australia adopted a private account system in the early 1990s under a Labor government.

Finally, no other reform would do so much to increase the liberty and prosperity of the American people.