VIEWPOINT: Sorting out Social Security stats

October 31, 2005

There is an unfortunate misunderstanding going around about the Social Security trust fund. These are facts:

First, the U.S. bonds that constitute its assets pay the same rate of interest as regular U.S. bonds. Second, the bonds held by Social Securi ty are not marketable, which means they can be cashed any time at par or face value. Other U.S. bonds are subject to the market if cashed before maturity. Third, the surplus is not there by accident; it was planned in 1983 to cover baby boomers who were expected to begin retiring in great numbers around 2020.

In 1983, so many people were out of work that Social Security taxes were on the verge of being insufficient to pay current retirement benefits. The two parties did a strange thing: They put aside childish partisan political posturing and cheap shots to solve the problem.

President Ronald Reagan, U.S. House of Representatives Speaker Tip O'Neill (a Democrat) and Senate Republican Majority Leader Bob Dole sat down at Blair House and composed the so-called Social Security bailout, which Congress enacted. People who say no previous administration was willing to plan for retirement of baby boomers are selling President Reagan short.

The bipartisan agreement included an increase in the Social Security tax rate and somewhat lower benefits to better-off retirees. As a member of the House Social Security Subcommittee, I helped pass the agreement. While we were at it, we raised the taxes and cut the benefits a little more to build a surplus to meet the anticipated additional expense of the boomer beneficiaries. The surplus is, in essence, a baby boomer trust fund within the regular trust fund, placed in the safest investment in the world, U.S. government bonds.

None less than President George W. Bush's secretary of the Treasury recently testified before Congress that these bonds are every bit as efficacious as any other U.S. bonds and will be paid in increments over the decades that follow 2017, when Social Security taxes start falling short of benefit obligations.

The Trust Fund won't even come close to running out in 2017. Its existence as a surplus insures full benefits each year until 2041, according to the Social Security trustees, or 2052, according to the Congressional Budget Office. Even on those dates, the current Social Security taxes are projected to cover 75 percent of benefits.

However, neither projection takes into account the real possibility of stunning advances in technology, which, in 30 years, quite likely will enable two workers to produce as much as three can today. Today, there are three workers per retiree. Thirty years from now, there will probably be about two.

Had productivity remained the same between 1935 and 1955, when there were about 15 workers per retiree, Social Security probably couldn't have fully paid the benefits in the 1950s. But, of course, productivity did leap forward and it continues to do so; hence, the phenomenon of the recent "jobless recovery."

The current proposal would divert the excess Social Security taxes from their commitment to the baby boomers to socalled personal accounts for younger participants in the program. This, of course, would shorten the 2041 and 2052 projections.

It is interesting to note the assertion that U.S. government bonds held in the Social Security trust fund simply mean the general government is using Social Security taxes to pay its bills for other things. Rep. Clay Shaw's (R-Fla.) proposal would take those already committed excesses and invest them in U.S. government bonds also. In neither case, though, would the government be simply diverting the excess Social Security taxes. As is the case with the other bonds it sells, it borrows the money and is legally obligated to pay it back with interest that is market-rate when the borrowing occurs.

When the general government does begin paying back the bonds it sold to Social Security, it will pay the money in gradual yearly increments to fill the annual gaps. Moreover, it will not be paying Social Security benefits; it will be paying its own overdue bills.

Jacobs is a local lawyer who served 30 years in the U.S. House of Representatives, where he chaired the U.S. House Ways and Means Social Security Subcommittee.
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