INSTITUTE FOR POLICY INNOVATION
Federal News Today
Newschannel 8
July 27, 2007, 7:47 PM
Interview with Larry Hunter
BROADCAST EXCERPT
MS. BEVERLY KIRK: Rightsizing the government, that's the phrase behind a growing new strategy to control government spending and reach a consensus on just how big the government should be.
Last week, a group of conservative economists met in Washington to discuss doing just that.
Joining me now here in the studio tonight is Larry Hunter, he's President of the Social Security Institute and senior fellow at the Institute for Policy Innovation, and Larry, thanks for being here.
MR. LARRY HUNTER [Senior Fellow, Institute for Policy Innovation]: Thank you.
MS. KIRK: You're talking about rightsizing the government and attempting to reach some kind of broad consensus on what the proper size of government should be in your view and the levels of government spending.
Talk about what that means and how you are hoping to accomplish it.
MR. HUNTER: Well, it's really quite a simple and common sensical notion and government cannot do anything unless it first extracts the resources from the private economy, and clearly, if the government doesn't exist, one wouldn't expect the economy to do very well. If it begins taxing resources out of the private economy to create the basic institutions of society, court system, police, one would expect economic output to grow, but at a certain point, you reach what the economists would call an optimal, the right size, and after that if the government takes more resources out of the economy, you reach a point of diminishing returns. And what we were talking about last week and what I think you will see economists and politicians increasingly talking about is where is that point?
Right now, government at all levels spends over 35 percent of gross domestic product. There was a consensus last week that that's at least 20 percent too large.
MS. KIRK: What ideally is the right size? Are you saying, you mentioned the 35 percent, so 15 percent?
MR. HUNTER: Well, there have been a number of empirical studies and the results range from a low of somewhere around 10 or 11 percent, up into the 20 percent range. This is not something that's easily measured and one would hope over a period of years the research would triangulate on a consensus answer, but one thing that came out of this body of research is that no matter what research you look at, even the maximum number that the economists have found, it's far less than we are currently spending.
So as I say, there was a broad consensus that if we cut back the size of government substantially, at least 20 percent and some say perhaps as much as half, that the economy would grow faster. There would be more of a pie to distribute and everyone would be better off.
MS. KIRK: So what method would you take to start this process? And what about people on the other side of the argument who would say that you can only cut so small and then you begin to cut into those necessary programs that most people agree a government has to provide?
MR. HUNTER: Well, of course, I think, we all agree at some point that happens and the question is when does it happen? There are a variety of techniques and ways to go about doing this. Certainly, looking at the upcoming baby boom retirement, it's clear that one of the areas that's going to have to be addressed is that of how do you take care of people in their retirement years? And I think we have now discovered that the old system of tax the young to transfer to the senior citizens doesn't work. It's unsustainable. And so we're going to have to find some way to move that function back to individuals and into the private sector so that people over their working careers can save money for their own retirement, having the government simply as a backup rather than the main source of retirement income.
MS. KIRK: And this issue, it's certainly coming up at an interesting time when you have the White House and Congress literally at loggerheads over government spending and President Bush has threatened to veto appropriations bills that go above what he thinks there ought to be in discretionary spending and Democrats have included spending that's really far above what he is asking for in the homeland security bill.
MR. HUNTER: Exactly. One has to take the political rhetoric with a grain of salt on both sides of the political aisle. One thing a lot of people have forgotten about is that when the Republicans took over the Congress and Bill Clinton was still in the presidency, they came up with a way to work together and when Bill Clinton left office, people don't realize this, the size of government was down under 18 percent of Gross Domestic Product and was headed toward 15 percent. After President Bush took over and the Republicans controlled both the House - both the Congress and the executive branch, spending took off again.
So there is a way of simply holding the growth of government down and allowing the economy to grow faster than the government and it doesn't take very many years until you get the share of government declining. We did it during the '90s with the Republican Congress and the Democratic president. We have backslid considerably in the first decade of the 21-st century. We're hopeful that we can reorient the way Congress makes decisions and hold the growth of government below the growth of the economy for a number of years.
MS. KIRK: All right. Larry Hunter, president of the Social Security Institute. Thank you for being here tonight.
MR. HUNTER: Thank you.
MS. KIRK: Appreciate it. And we have an update for you on the homeland security bill Larry Hunter and I discussed. Congress sent President Bush legislation this afternoon to intensify anti-terror efforts in the U.S., shifting money to high-risk states and cities and expanding screening of air and sea cargo. The bill passed the House by a vote of 373 to 40. The Senate approved the measure last night and President Bush said that he will sign that bill.
[END OF INTERVIEW.]
IPI POLICY BYTES
How many times do we have to say it?
By: Larry Hunter
July 31, 2007
Washington Post columnist Robert Samuelson claims that the problem of what to do about the looming entitlement crisis has been ignored because, "Washington's vaunted think tanks-citadels for public intellectuals both liberal and conservative-have tiptoed around the problem"...failing to..."expand the public conversation by saying things too controversial for politicians to say on their own. Here, they've abdicated that role."
To the contrary, IPI has been on the cutting edge of saying things about entitlement reform that not only politicians but also most Washington think tanks are afraid to say. Mr. Samuelson seems to have missed IPI's web site ( www.ipi.org) where he would find a burgeoning library of reports on what to do about Social Security and Medicare that refute the conventional wisdom that has policy makers wringing their hands, trapped in a false dilemma of their own making.
Indeed, it was IPI that developed the plan on which Congressman Paul Ryan (R-WS) and Senator John Sununu (R-NH) based their plan to reform Social Security with personal retirement accounts.
But more important than the details of any particular reform plan, IPI has offered a solution to financing comprehensive reform in a practical step-by-step manner based on a financial approach similar to a standard corporate workout, which one sees in private-sector bankruptcy proceedings everyday. The essence of the plan is a financial and operational reorganization that borrows funds to replace the currently unsustainable tax-and-transfer government-benefits program with a market-based investment program financed by refinancing outstanding government debt obligations with new debt backed up not only by the full faith and credit of the United States government but also by the productive power of the U.S. economy.
Americans have a well deserved skepticism of public debt. As Milton Friedman observed: "History suggests that Washington spends whatever it receives in taxes plus as much more as it can get away with. Deficits have been the norm." ("What Every American Wants," Wall Street Journal Opinion Journal, Sunday, January 19, 2003.) Government borrowing, as a rule, is undesirable because it simply increases the amount of resources the government can extract from the private sector over and above what it can tax; it usually facilitates overspending.
However, there are very important instances in which public borrowing can help reduce the size of government and lead to overall improvements in economic efficiency. Friedman himself recognized these opportunities when he put forward a simple plan for solving the looming Social Security crisis.
Friedman outlined his plan in Free to Choose and earlier writings. His proposal was to simultaneously repeal payroll taxes, keep the government's pledge to pay all Social Security benefits promised under current law, and buy out younger workers by swapping their entitlement to future retirement benefits for an annuity of equal value or an equivalent amount of government bonds. Workers would then be able to fund their own retirement. Friedman proposed financing the reform by issuing new federal debt.
"This transition," Friedman wrote, "does not add in any way to the true debt of the U.S. government. On the contrary, it reduces that debt by ending promises to future beneficiaries. It simply brings into the open obligations that are now hidden. It funds what is now unfunded."
The personal-accounts plan that IPI developed was essentially a version of Friedman's proposal. In numerous newspaper op-eds and reports, I explained why borrowing the money to pay so-called "transition costs" to personal retirement accounts does not comprise new borrowing and is the only economically rational way to reform Social Security.
Contrary to the conventional wisdom about so-called "transition costs"-a conventional wisdom perpetuated by Washington think tanks on both the right and the left who are obsessed with cutting future Social Security benefits, increasing taxes and raising the retirement age-the transition to fully funded personal retirement accounts is similar to a corporate workout. No new debt is required. Existing debt is simply refinanced to provide time and free up cash to restructure the operation, making it more efficient and productive in the future so that it is capable of providing better retirement benefits while repaying all the debt.
How many times do we have to say it?
February 8, 2007 Edition
Social Security Retreat
BY LAWRENCE HUNTER
It's now confirmed - Social Security reform is off the table for this year and perhaps for the rest of President Bush's term of office. Treasury Secretary Paulson said as much in a statement last week. This is how it happened.
Shortly before delivering this year's State of the Union address, President Bush removed language from it calling on Democrats to negotiate on reforming Social Security with all options on the table. For weeks before the speech, Secretary Paulson had tried to entice Democrats to the table by signaling the administration's willingness to consider any and all options. Numerous outside conservative advocacy groups worked Capitol Hill and the press on behalf of the White House to convince conservatives that considering a tax increase would be required to bring Democrats to the table.
Their efforts collapsed, and the president was forced to withdraw from the issue before delivering his speech because most conservatives found talking about tax increases unacceptable, and liberals were unwilling to discuss creating real personal retirement accounts substituting for part of the current system and financed by a portion of workers' payroll taxes.
Rep. Rahm Emanuel of Illinois put a stake through the heart of the president's negotiating strategy when he told a reporter that if the president wanted to do something on Social Security, he would have to lead the charge himself because the Democrats weren't going to participate. Conservative columnist Robert Novak confirmed the collapse of the president's strategy, reporting, "Democrats refuse to talk with Republicans about personal accounts 'carved out' of the present system. Indeed, a 'carve out' is now a dead letter. New personal retirement accounts could be passed only as an 'add on'...," that is, a new entitlement program, paid for by additional tax increases.
On the right, while the White House had made headway convincing some conservative organizations to include tax increases in the discussion, a substantial number of conservatives led by Reps. John Shadegg of Arizona and Mike Pence of Indiana revolted against the White House strategy. They understood this latest stumble by the administration was just the most recent misstep in a long line of missteps that has placed the Social Security reform effort on a slippery slope to perdition - to large middle-class tax increases, large future benefit cuts, and a huge new entitlement program of add-on accounts that would end up being more about income redistribution than retirement security and prosperity.
For over two years, a senior fellow at the Institute for Policy Innovation, Peter Ferrara, and I have been warning against the administration's proposed "progressive price indexing" to cut future Social Security benefits by close to 40% for young workers. We said the administration's obsession with cutting future benefits not only would blow back and lead to a tax increase but also would undermine efforts to achieve real personal accounts. Mr. Ferrara, who wrote the first book on personal retirement accounts for the Cato Institute, said that Democrats never would accept benefit cuts without "balancing" them with large tax increases and would agree to personal retirement accounts only if they were "add-on" accounts. He was right. Rep. Emanuel pulled the plug on negotiations.
President Bush is to be commended for recognizing reality and making this strategic retreat, in which there is no shame when continuing to pursue a failed strategy will only make matters worse. Withdrawing now, when there is no hope of success, will allow conservatives time, and another presidential election, to reorganize themselves and build the grassroots support necessary to enact real Social Security reform with real personal retirement accounts a few years down the road.
Unfortunately, some conservatives don't appreciate the prudence of a strategic retreat. Illustrative is the vice president for policy and economics at the Independent Women's Forum, Carrie Lukas, who in a January 25 article on National Review Online attacked Mr. Pence as "unprincipled" and "foolish" for rejecting new taxes. Shame on her.
Instead of urging conservatives to embrace a tax increase in order to get a deal with Democrats, backers of real personal accounts should give up the strategy as unsound and undoable. Until a grassroots volunteer army for true reform can be raised, conservatives should take the position they held at the beginning of the Bush administration, as embodied in the Ryan-Sununu bill, which sought real personal accounts and lower taxes and envisioned higher, not lower, retirement income.
To reignite grassroots enthusiasm for personal accounts, particularly among young people who have the most to lose if Social Security isn't fixed, conservatives should offer proposals that harness the broad consensus that already exists in the country for reforming the program.
If the president wants to make one more run at doing something serious about Social Security before he leaves office, he should offer legislation to stop raiding Social Security to pay for other programs and use its surpluses and interest due the Trust Fund to finance a refundable tax credit for anyone who opens a Head Start Retirement Account for a child under 18.
Mr. Hunter is president of the Social Security Foundation and senior fellow at the Institute for Policy Innovation.
The Washington Times
www.washingtontimes.com
Stop raids on Social Security
By Lawrence A. Hunter
Published December 15, 2006
Advanced maneuvering for the coming White House sellout on Social Security is well under way. The only question remaining is will the legacy-desperate, Iraq-beleaguered president succeed in bamboozling members of Congress into launching a totally unnecessary, strategically disastrous pre-emptive strike on Social Security to raise taxes and cut future benefits in the name of heading off a non-existent "solvency crisis?"
A worrisome sign the White House might actually pull off this scam came last week when one of the president's biggest cheerleaders for his last pre-emptive strike -- the Editors of National Review -- said they were willing to take personal accounts off the table and accept a Social Security tax increase. Here we go again.
Another indication that the sellout is well advanced came earlier this week when outgoing chairman of the House Ways and Means Committee, Rep. Bill Thomas, California Republican, reportedly told an American Enterprise Institute forum on tax havens and tax competition that the people he talks to inside the Bush administration are clearly signaling their willingness to acquiesce with a wink and a nod to higher marginal tax rates as part of a larger fiscal deal.
The administration's advance guard of Chicken Littles, such as the nonprofit FOG Brigade (For Our Grandchildren) -- call them neosolvents or "neosols" -- are fanning out through the Halls of Congress spreading fear about the program's solvency and propagating the urgency of cutting a deal with the Democrats before this president leaves office: It's the legacy, stupid. It looks like the president hopes to tempt Democrats into participating in what might be called "Operation Trinity," a pre-emptive strike on Social Security that forgoes use of conventional personal accounts in favor of three nuclear options: tax increases, benefit cuts and increases in the retirement age.
When confronted with the suggestion the president has taken the conventional option of personal accounts off the table, the White House reacts as it does typically when crossed and starts trashing its critics and placing calls to Capitol Hill twisting the arms of conservative members who would dare to throw a monkey wrench into their carefully calculated strategy to bring solvency to Social Security. "Of course, personal accounts remain on the table," the administration insists, but what they don't say is that the accounts they have in mind are add-on accounts financed not by Social Security surpluses but by a tax increase, a k a another new Bush entitlement program: Mission Accomplished.
By actuarial standards applicable to any private pension fund, the Social-Security Ponzi scheme already is insolvent, papered over by IOUs Congress has written to itself. Social Security's near-term cash-flow situation, however, is quite good, scheduled to remain in surplus until 2017; until 2027 if the annual interest due the Trust Fund is taken into account, as it should be. Therefore, higher tax revenues today that enlarged and extended the surpluses would not improve the program's solvency; they would only paper it over with more IOUs and magnify the size of the theft Congress perpetrates on the Trust Fund each year. If Congress wants to do something serious about Social Security's solvency, it should stop the raid on Social Security, not expand it.
Rather than rush to the nuclear options of raising taxes, cutting future benefits and raising the retirement age, if Congress would only stop stealing the Trust Fund surpluses and get about actually paying the Trust Fund the annual interest owed it and then start using those surpluses and interest payments to begin prefunding future retirees' retirement, Social Security could be made solvent for decades to come without raising one new dollar in taxes or cutting a single dollar in future benefits or making old people work one year longer.
Here's a modest proposal: Why doesn't the new Congress get itself straight with the American people, stop the raid on Social Security, begin paying the interest it owes to the Social Security Trust Fund and devote those interest payments along with the annual payroll-tax surpluses to financing a refundable tax credit to anyone opening a retirement account for a child younger than 18? Call them Head Start Retirement Accounts.
Lawrence A. Hunter is former staff director of the congressional Joint Economic Committee.
Copyright (c) 2006 News World Communications, Inc. All rights reserved.
The Washington Times
www.washingtontimes.com
Letters to the editor
LETTERS TO THE EDITOR
February 23, 2007
Just say no to high-tax 'darlings'
Donald Lambro's article "GOP 'darlings' slow to sign tax-cut pledge" (Page 1, yesterday) should be a red flag to all conservatives and ought to spur them to action. According to Mr. Lambro, both Sen. John McCain and former New York Mayor Rudolph W. Giuliani are hiding behind their records as an excuse not to sign an anti-tax-increase pledge that has become routine for Republican presidential candidates.
It's a "trust me" excuse. Well, "trust me" doesn't cut it.
It's time to send candidates from both political parties, but especially Republicans who pretend to carry the low-tax/limited-government standard, an unambiguous signal: No signature on the anti-tax-increase pledge, no vote at the polls. Why doesn't some flush conservative advocacy group organize a voters pledge drive: "I pledge not to vote for any presidential candidate who refuses to sign the anti-tax-increase pledge." Maybe that will get their attention. I'll be first in line to sign it.
LAWRENCE A. HUNTER
President
Social Security Foundation
Senior fellow
Institute for Policy Innovation
Warrenton, Va.
GOP 'darlings' slow to sign tax-cut pledge
By Donald Lambro
THE WASHINGTON TIMES
Published February 22, 2007
The two front-runners for the 2008 Republican presidential nomination -- Arizona Sen. John McCain and former New York Mayor Rudolph W. Giuliani -- have not signed an anti-tax-increase pledge that has been embraced by several of their rivals.
The reluctance of the party's two leading candidates to sign the pledge, which has been signed by every Republican presidential nominee since 1988, raised concerns among conservative tax cutters about Mr. McCain's and Mr. Giuliani's commitment to reduce tax rates at a time when all of the Democratic presidential contenders have vowed to raise income taxes if they are elected.
"I can't imagine that McCain wouldn't sign it or that Giuliani wouldn't sign it. I can't imagine any Republican not signing that," said Jack Kemp, architect of the tax cuts signed by President Reagan in the 1980s.
The pledge, which asks the candidates to sign a statement declaring they will "oppose any and all efforts to increase the marginal income tax rates," could become an issue for both men as they vie for the support of their party's economic conservatives -- especially for Mr. McCain who was a foe of President Bush's tax cuts until he began actively running for president last year.
The Arizona senator, who has been aggressively reaching out to the conservative base of his party to secure the nomination, was one of only two Republicans who voted against Mr. Bush's $1.35 trillion across-the-board tax cuts in 2001. He also opposed accelerating the tax cuts in 2003, but changed his mind last year and voted to extend the tax cuts, including those on stock dividends and capital gains.
Mr. Giuliani has yet to fully set forth his views on tax policy, but, like Mr. McCain, has said that the Bush tax cuts, most of which are due to expire in 2010, should be made permanent.
"Senator McCain has over a 20-year record of opposing tax increases and the senator's record speaks for itself," said Danny Diaz, chief spokesman for the McCain campaign.
"The senator supports making the tax cuts permanent. There has been no stronger voice in Washington, D.C., for fiscal discipline," Mr. Diaz said.
But when asked if the senator would or would not sign the pledge never to raise tax rates if he should become president, he replied, "no comment."
A spokesman for Mr. Giuliani yesterday also declined to say whether the former mayor, who leads Mr. McCain in many voter preference polls, intended to sign the pledge.
"Mayor Giuliani has a strong record of cutting taxes" in New York, said Maria Comella, deputy communications director for the Giuliani campaign. When asked directly if he will sign the pledge, she replied, "His record speaks for itself."
The pledge is a written document that has been circulated among Republican candidates since 1986 by Americans for Tax Reform (ATR), a tax-cut advocacy group that has been an influential force in the tax-cut battles of the past two decades. Every Republican presidential nominee since then has signed it, making it a ritual threshold for candidates to demonstrate their opposition to higher taxes.
Grover Norquist, president of ATR, said yesterday that the pledge has been signed by several Republican presidential contenders, including former Massachusetts Gov. Mitt Romney, Sen. Sam Brownback of Kansas, Rep. Duncan Hunter of California, and former Virginia Gov. James S. Gilmore III.
"In my conversations with each of the campaigns, it is my expectation that before the summer's out all of the Republicans running for president will have signed the pledge," Mr. Norquist said last night.
Mr. Romney, who has made his economic conservatism the centerpiece of his campaign, signed the pledge on Dec. 31, a few days before he left the governorship.
Those who have not signed it, besides the two front-runners, include Nebraska Sen. Chuck Hagel (who has signed previously as a senator) and former Arkansas Gov. Mike Huckabee.
"McCain has signed it in the past and I assume he will sign it again, and I expect Mr. Giuliani to sign it," Mr. Norquist said.
Some Republican tax cutters expressed dismay yesterday that neither of the two front-runners had signed the pledge at this point in the two-year election cycle.
"I can't imagine why they wouldn't sign a statement against raising the tax rates. Someone might not want to bind themselves down to any tax increases, on cigarettes or something like that, but this says tax rates," Mr. Kemp said.
"I'd sign it, but I'm not running. But the bigger issues are reforming the tax code to make it simpler and more efficient and bringing the tax rates down for maximum economic growth," he said.
Copyright (c) 2007 News World Communications, Inc. All rights reserved.
Stop the Raid. Stop the Tax Hike.
Phil Kerpen
Policy Director, Americans for Prosperity Foundation
Social Security has a problem even bigger than its impending insolvency-it is a terrible deal for young workers. Because I'm young, single, and male, Social Security promises me a 1.5 percent real rate of return. And that's what it promises-not what it can actually afford to pay, which is more like half a percent. That's more like passbook interest than an investment return.
The problem is not that benefits are too high-it's that they're so much lower than real investments could provide. Any increase in taxes or cut in benefits would only make a bad deal even worse, giving young workers a negative return.
In 2007 there is a real risk that, motivated by a spirit of compromise, once stalwart supporters of pro-worker reform may be willing to accept a very anti-worker compromise.
The contours of a deal are starting to appear around a payroll tax increase and cuts in promised future benefits for higher income workers. Personal accounts would not be included at all. These measures are entirely about what's best for government-finding a way to make the books balance on paper so they can keep on spending our Social Security dollars on unrelated, wasteful programs.
Raising the wage cap is a key part of the rumored White House bargain with Democrats. The wage cap is the amount of income that is subject to social security taxes. This would cancel out many of the gains of the Bush income tax cuts, his signature policy achievement.
AARP is calling the tax-hike-for-future-benefit-cuts deal a "balanced bargain," but two anti-worker measures don't balance each other out, they just tilt the scales even further away from workers and towards big government.
To stop any attempt to make Social Security an even worse deal for workers than it already is, we need to shine light on the raid, which is Congress's unconscionable practice of using Social Security funds for unrelated programs.
The Social Security Raid
The most remarkable thing about the anti-worker deal that appears to be coming together is that it has been done before. In 1983 Social Security had a cash crunch. Because of shifting demographics, the program was within months of not having enough money coming in to pay benefits. Government solved its problem by making the problem for workers worse-it raised taxes, cut benefits, and increased the retirement age.
The result was large and growing cash surpluses-more money coming into Social Security in payroll taxes than going out in benefit payments. But Social Security is a pay-as-you-go system, which means that the taxes that come in each year are used to pay benefits for retirees that year. There is no mechanism for investing any excess funds that are left over.
Surpluses, which in theory should fund benefits for future retirees, are instead raided by Congress and squandered on unrelated spending programs. The late Democratic senator from New York Daniel Patrick Moynihan, a leading proponent of personal retirement accounts, called this "outright thievery."
Here's how the raid works: payroll tax dollars go into the Social Security Trust Fund, which in turn uses them to buy special issue bonds from the United States Treasury. Then Congress can use those dollars, in the treasury, to spend on anything they want. All that Social security has are the bonds. The bonds pay interest, but Congress raids the interest, too, by simply placing more bonds in the trust fund. The trust fund itself is a filing cabinet in West Virginia-it doesn't have any real funds in it and you probably shouldn't trust it.
President George W. Bush explained this pretty well in a speech in 2005: "You pay your payroll tax, we pay out to current retirees, and then we spend your money on other government programs."
In 2006 this thievery reached a milestone, passing the staggering number of $1 trillion, that's $1,000,000,000,000. The chart below shows the enormous amount of money that Congress has raided from Social Security since 1984, allowing them to fund innumerable wasteful programs and pork-barrel projects while concealing the size of the deficit.
The raid on Social Security from 1984 to 2006 amounted to about $7,231 per worker, without interest. If it had been invested annually in large cap stocks, measured by the S&P 500 index, it would be worth more than double, $14,882.
Of course $14,882 is not enough money to retire on by any means, but it is a significant amount of "outright thievery," and most workers would have preferred to save that money for retirement rather than allowing Congress to squander it. Moreover, consider its future value at retirement-if invested in stocks, which grow, on average, about 7 percent faster than inflation, it could be worth, in real terms, over $80,000 in 25 years.
The Raid Goes On
For young workers and students about to enter the workforce, 1983 may not seem relevant. Some young workers were not even alive then. But the 1983 deal matters to all workers today because Social Security is still in cash flow surplus, and Congress is still raiding it. In fact payroll taxes are projected to exceed benefit payments through 2016. In 2017, baby boomer retirements will tip the system into shortfall. Without reform to protect the surplus in
personal accounts, Congress will continue to raid Social Security dollars for unrelated spending. The chart below shows the projected future raid based on the 2006 Social Security Trustees Report:
Under present law, Congress will raid Social Security funds to the tune of $693 billion over the next decade. This fact alone should make any discussion of increasing payroll taxes, whether by rate increase or raising the wage cap, dead on arrival. Any increase in payroll taxes would simply provide Congress with more money to raid and spend on unrelated programs. It would amplify the size of the larceny while doing nothing to make Social Security a better deal for workers.
Surplus Accounts: What If?
What if instead of raising the Social Security surplus, the funds were used to start pilot-sized personal accounts, as an initial transition, if successful, to a more substantially reformed system?
This idea was introduced last Congress, by Sen. Jim Demint, R-S.C., and several members of the House Ways and Means Committee, including Rep. Paul Ryan, R-Wis., and John Shadegg, R-Ariz. Under their "stop the raid" bills, Social Security surpluses, after all benefits have been paid, would be placed into personal accounts.
The plan recognized the reality that the only way to keep Washington from spending our Social Security money is to take it away from them. There are only two real ways to accomplish that-either cut the payroll tax to the amount Social Security actually needs, or direct surpluses into accounts that individual workers own and control. Either way workers, not Congress, would have control of those dollars and be empowered to use them to save and invest.
Let's assume a real, inflation-adjusted return of 6.5 percent, which is the estimate used by the Social Security actuary for stock market investments. The average worker would accumulate, in real 2006 dollars, more than $6,300 through 2016. If those years are the first 10 years of a 45 year career, that $6300 would grow to over $57,500 at retirement in 2051, with no additional contributions.
That's over $50,000 just from preventing Congress from raiding Social Security's cash surpluses. If the interest that Congress "pays" to the trust fund by issuing bonds were made real by issuing those bonds to the personal accounts instead, an imminently reasonable step to turn the raid into something more like a real lean, the size of the accounts would increase dramatically, to over $19,000 in 2016, which would grow to over 170,000 in 2051, with no additional contributions.
Reform is Needed, But First Do No Harm
Unfortunately, given the ferocity of opposition to personal accounts, even accounts limited to the modest size of the surplus are not politically feasible this year. The calculations above are therefore important more to illustrate the scale of the raid and how much it costs every worker.
The possibility of a so-called compromise that would raise taxes and cut benefits is possible this year, and it is critical to note that the primary impact of such a plan over the next 10 years would be to simply magnify the size of the raid.
For a rough guess of how much the raid could increase, I looked to the chief actuary of Social Security's scoring of a plan proposed by Peter Diamond and Peter Orszag, a good example of the type of plan being considered. Under there plan the raid would last five years longer, and more than double from $693 billion to $1.9 trillion.
Even a less extreme plan would magnify the size and length of the raid, potentially costing average workers hundreds of thousands of dollars in future retirement savings. Increasing the size of the already unconscionable raid is indefensible.
Fifty years ago, there were 16 workers for every retiree. Now there are three, and soon there will be only two. If Social Security continues to be a transfer payment it will place an incredible strain on workers in the near future, which would derail economic growth. Higher taxes would kill jobs, slow the economy, and harm financial markets.
Social Security simply cannot be propped up in its present structure without damaging American workers and the economy. Structural reform is needed, but until the political will for it exists, we should not, in a rush to action, make a bad deal worse.
The Washington Times
www.washingtontimes.com
Head start for retirement?
By Lawrence A. Hunter
THE WASHINGTON TIMES
Published April 11, 2007
On March 22, the Senate defeated an amendment by Senator Jim DeMint, South Carolina Republican, that would have made it possible under the Congressional Budget Resolution for Congress to stop spending Social Security surpluses on other government programs and begin saving the Social Security surplus for future generations. Finance Committee Chairman Max Baucus, Montana Democrat, made it a party-line matter when he waved the bloody shirt of "privatization," calling the DeMint amendment "smoke and mirrors" to privatize Social Security. Only one Democrat, Claire McCaskill of Missouri, had the courage to buck the party line and vote "yea."
Far from being smoke and mirrors, the DeMint amendment actually dispelled the government-accounting smog that currently provides legislators cover as they dip into the Trust Fund like thieves in the night. The stop-the-raid amendment would have made it possible under the arcane congressional budget rules for Congress finally to get straight with the American people and stop raiding Social Security to build bridges to nowhere and pay off special interests.
Congress has been raiding the Social Security surplus for more than 20 years. Including interest, Congress has now spent $2 trillion of Social Security money on other government programs since 1984. And then our illustrious elected representatives have the gall to turn around and scaremonger American workers and senior citizens that the system faces financial collapse unless taxes are raised and future benefits cut. No wonder the program's finances are in horrible shape; Congress spent the money that should have been going to prefund workers' retirement. Mr. Baucus' rant against "privatization" is simply a rhetorical scam calculated to keep the pyramid scheme going for yet another generation while the politicians take credit for "saving" Social Security every 20 years or so. Meanwhile, Social Security becomes a worse and worse deal for each new generation of workers.
Congress pilfers the Social Security Trust Fund monies in two ways. First, Congress misappropriates annual payroll tax surpluses directly on other programs. Second, Congress avoids raising tax revenue or borrowing money from the public to pay the Trust Fund the interest it is due by giving it "special-issue" IOUs that do not show up as part of the national debt and are not backed by an adequate dedicated revenue source. This scam is the same as if Congress borrowed the money from the public, paid the Trust Fund the interest and then, as with the excess payroll tax revenue, raided the interest paid the Trust Fund and spent it on other programs, leaving behind the same IOUs.
Anyway you look at it Congress is snatching both the excess payroll tax revenues and the interest and using these Trust Fund monies to spend on everything else but pre-funding workers' retirement. Mr. DeMint's amendment would have made it possible to stop this tawdry practice without running afoul of Congress' arcane budget rules.
Between 2008 and 2026 when the Trust Fund is projected finally to be depleted, Trust Fund assets will increase each year due to interest and excess payroll tax revenues by a sum total of $3.9 trillion. If those monies were compounded at a modest 51/4 percent rate of interest, that $3.9 trillion would compound into a whopping $6.6 trillion by 2026.
If these annual increases in Trust Fund assets no longer were raided and spent on other programs, they could instead be devoted to prefunding a portion of future workers' retirement. For example, I have urged that these Trust Fund monies be used to allow parents, grandparents and other concerned adults to open a Head Start Retirement Account for any child under the age of 18.
Were Congress to come clean and stop the raid on Social Security, it would be possible to devote the $3.9 trillion in excess payroll tax revenues and interest payments to Head Start Retirement Accounts for the next generation of workers. For the next 17 years, it would be possible to finance these accounts at an annual average level of $2,500 for every child in America under age 18.
By my rough calculations, such a program would allow a child born in 2008 to accumulate a Head Start Retirement Account nest egg amounting to about $80,000 by the time he is 18. Even if not one additional dime is put into that account, if it continues to compound at an annual rate of 51/4 percent (just about what you can get in a bank CD these days) throughout his working career, his retirement nest egg will grow to more than $1 million by the time he retires at age 67 in 2074.
It's painfully clear that the Congress is not yet prepared to stop playing games and lying to the American people about Social Security. Therefore, it is not too early to begin demanding that presidential candidates take the pledge to stop the raid and give the next generation a head start on retirement.
Lawrence A. Hunter is president of the Social Security Foundation and senior fellow at the Institute for Policy Innovation.
Copyright (c) 2007 News World Communications, Inc. All rights reserved.
REVIEW & OUTLOOK
Not So Grand Bargain
How to turn election defeat into a Social Security rout.
Thursday, November 30, 2006 12:01 a.m. EST
The Bush Administration has been around long enough that by now we can smell a retreat in the making. To wit, the White House is getting ready to throw personal retirement accounts over the side in an attempt to cut a Social Security deal with the new Democratic Congress. Will a tax increase be the next concession?
President Bush has made no secret of his desire to claim some kind of Social Security deal as a legacy before he leaves office. Asked last week about possible negotiations, Treasury Secretary Hank Paulson declared there would be "no preconditions." Without quite admitting that personal accounts have to go, White House aides say dropping them is the price Democrats will demand even to discuss Social Security. While an attempt at bipartisanship is fine, the contents of the potential deal are worrisome.
The evident White House hope is that, in return for this retreat on personal accounts, Democrats would agree to reduce the growth of future Social Security benefits. Specifically, that means some form of "progressive indexing" that Mr. Bush endorsed in a failed attempt to coax Democrats from their just-say-no Social Security strategy in 2005.
Promoted by financier Robert Pozen, "progressive indexing" would adjust future Social Security benefits according to a cost-of-living index. Currently, benefits rise each year based on the increase in average wages, which over time has meant about 1% a year faster than general price inflation. This wasn't part of Social Security's original plan but became law in 1977 as politicians sought to buy off the senior lobby by increasing benefits. This means retiree benefits will double in inflation-adjusted dollars by 2077--so changing to an inflation standard certainly makes fiscal sense.
The Pozen plan is also "means-tested," meaning that the wages standard would change to the inflation standard on a gradual basis as retiree incomes rise. Lower-income workers would see no change in their benefit formula. Estimates are that the Pozen plan would nonetheless save enough money to eliminate about 70% of Social Security's current unfunded future liabilities. The White House hope is that if Democrats agreed to "progressive indexing," they and the President could then declare a bipartisan political triumph of having "saved" Social Security.
We endorsed the Pozen proposal last year, but that was when it was floated as a tradeoff for personal Social Security accounts. If those accounts are now off the table, then this kind of "grand bargain" is no bargain at all.
It is true that the Pozen plan would reduce future taxpayer liabilities on paper, but the key words are "on paper." No one can guarantee that future Congresses won't turn around and promise greater benefits once again as Congress did in 1977 and many other times over the years, even if the 110th Congress agrees to the Pozen formula. Al Gore used the temporary budget surplus as an excuse to promise more benefits as recently as the 2000 Presidential campaign.
More broadly, genuine Social Security reform is about more than federal accounting and "solvency." It ought to be about individual ownership and retirement independence. Personal accounts are a way to let younger workers--especially lower-income workers--put some of their payroll taxes into accounts that they would own and could grow over time. They would build wealth, and their future benefits wouldn't depend on the whims of future politicians. The Pozen plan by itself merely reduces their benefits and maintains Social Security as a cross-generational income transfer program.
As for "bipartisan" politics, Democrats cynically refused even to discuss Social Security reform last year, though they well know that benefits will soon start exceeding payroll tax revenues. Now that Democrats run Congress, they can reduce future benefits if they want to. But if they now want Republicans to give them political cover for doing so, at least the start of personal accounts should be part of the price.
There is also the issue of that 30% of future liabilities that would remain unfunded even under Pozen. Odds are that Democrats will pocket Mr. Bush's concession on private accounts and then move the goal posts. In return for even the modest Pozen reductions in benefit growth, they'll demand that Mr. Bush agree in the name of "fairness" to raise taxes too. And if Mr. Bush does that, his own political coalition will splinter like a tree hit by lightning.
We wish we were confident that Mr. Bush will resist this temptation, but Presidents on a legacy hunt are hard to predict. The Beltway press corps and many of his own advisers will also be cheering him on. His former White House economic adviser, Lawrence Lindsey, warned on these pages recently that the White House is contemplating precisely this kind of deal.
On Social Security, Mr. Bush fought the good fight, only to be foiled by Democratic intransigence and troubles in Iraq that slashed his approval rating and thus his power to persuade. His achievement has been to offer a framework for reform that will be vindicated by some future President. He shouldn't tarnish that by signing onto one more temporary Washington fix that trades an immediate tax increase for the promise of future benefit cuts.
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