Social Security: Where the Candidates Stand

Treasury Secretary Henry Paulson appeared in a press conference on Tuesday offering the annual release of the Trustee reports for Social Security and Medicare -- two critical entitlement programs for the disabled and seniors. It should surprise nobody that the reports are bad.

Paulson said:

"Social Security program is financially unsustainable and requires reform. In fewer than 10 years, cash flows are projected to turn negative -- meaning that we will draw upon general revenues to support withdrawals from the Trust Funds in order to pay current benefits."

His statements have several flaws, and shouldn't cause politicians or the public to make rash decisions.

First, the report says -- as did last year's -- that Social Security proves viable until 2041 without any benefit cuts at all. After 2041, the program would continue to pay out benefits at a lower rate, about 75%. Over the next 75 years, the system will experience a $4.3 trillion shortfall. This number proves small over a 75 year period. Just think of the comparison to the Iraq war, which would cost us $3 trillion by its conclusion. We have 33 years to figure out how to maintain Social Security benefits for future generations. Of course, a strong period of economic growth could resolve many of the problems.

Second, Paulson exaggerates the "negative" cash flow problem the federal budget will experience in 2017. The Social Security Trust fund has booked massive reserves ever since the Greenspan Commission completed its work in 1983. The reserves will stop in 2017. This means that the program will have to be funded by paying back -- over time -- the bonds currently sitting in the Trust fund. Yes, the government has been borrowing from itself to hide the federal deficit and yes, the federal government has no choice but to honor these commitments.

The public should ignore the siren calls of doom from those who opine that the Trust fund does not exist. It exists. If the federal government failed to pay those bonds, it would cause a bond market meltdown. This will not occur.

Dean Baker, a co-director of the Center on Economic and Policy Research, wrote yesterday on his blog:

"There was nothing in these reports suggesting any qualitative deterioration in the financial state of these programs compared to their situation last year. The trustees claim, reported in this article, 'that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes' is simply a lie."

This assessment harshly states the truth. The reports indicate nothing has changed and headlines should not suggest some new disaster.

It does not help that the Bush Administration has made no effort to address the entitlement problem in a serious way. In fact, it exacerbated the problem with the Medicare Reform Act of 2003 by disallowing the federal government to negotiate for lower prices through bulk discounts on drugs. This increased Medicare costs.

On Social Security, the Administration offered a plan to privatize accounts. While the idea might have some theoretical merit, in practice the costs of privatizing remain problematic. William Galston, a professor at New York University and a Brookings Institution scholar, wrote last year:

"If the Social Security system's principal problem was a long-term threat to its solvency, as the President rightly argued in his 2005 State of the Union address, it was not clear how private accounts were even part of the solution. At best, they would function alongside of, and in addition to, needed fiscal reforms; at worst (and this turned out to be the case), they would exacerbate the system's fiscal woes."

Clearly, privatization would come at a high cost.

Interestingly, Sen. John McCain (R., Ariz.) has decided to revive Bush's failed plan at privatization as the Republican nominee for president. McCain's Web site states:

"John McCain supports supplementing the current Social Security system with personal accounts -- but not as a substitute for addressing benefit promises that cannot be kept."

Unfortunately, insufficient material exists on his Web site to account for the cost of personal accounts. His campaign was unable to comment in time for this piece.

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