RECENTLY, there has been a lot of talk coming from President Bush about building an "ownership society." While this slogan has been used to characterize a number of his proposals, it has been especially prominent in regards to his suggestions to partially privatize Social Security. Although the "ownership society" is a great political slogan, in reality President Bush's ideas undercutfiscal responsibility by threatening to bankrupt the Social Security system.
While privatizing Social Security is not inherently a bad idea, the ideas that President Bush has mentioned threaten America's economic future. Essentially, President Bush's proposals for privatization would allow Americans to keep somewhere between one-third and one-half of their private Social Security tax and invest in the market.
Although this could allow Americans to gain a better return on their dollars by investing in the market while helping address America's dangerously low level of household savings, it creates enormous transition costs.
These costs arise because privatizing Social Security would allow Americans divert billions of currently taxed dollars from the Social Security system to private investments. Indeed, as Federal Reserve Chairman Alan Greenspan told the U.S. Senate, the president's plan would cost $1 trillion over the next 10 years. To put this figure in perspective, the entirety of the budget deficit in 2004 came in at $412 billion. Ultimately, this shortfall would have to be addressed by combination of tax increases and benefit cuts, by adding on to the ballooning federal deficit or by tapping the Social Security trust fund.
If these costs are addressed by drawing money from the Social Security trust fund, the entire system would become unsustainable much sooner. This is because the Social Security trust fund is already too small to pay for the baby-boomer generation's promised benefits, and removing money from it would only make the system's problems more troubling. Indeed, while President Bush has repeatedly stated that the Social Security system will be unable to pay for its promised benefits by 2042, a 2002 Brookings Institution report indicated that privatizing Social Security would cause this to occur around 2025. With this in mind, it is clear that President Bush's plan for Social Security privatization cannot be taken seriously unless it addresses this financial shortfall.
While Bush's plan would be a threat to the long-term viability of the Social Security system, it would also be a drag on the economy of today. Indeed, Bush's plan would balloon the federal budget deficit by creating a program with unfunded financial obligations twice the size of the current budget deficit. Although some commentators have pointed out that the privatization program would counteract the effect of increased government borrowing with equally greater private savings, they ignore the unique harm that is caused by the federal deficit. Although private investors will not collect on their dividends for decades, the federal government will be forced to pay the interest on its debt today. By increasing the government's debt management burden, this plan would force the government to cut back on other priorities, such as defense and education.
Moreover, increasing the federal government's debt burden would hurt the economy by forcing the government to either raise taxes or cut spending without actually increasing the nation's savings rate. In this manner, President Bush's Social Security plan would increase unemployment in an already anemic job market and threaten the economy with a slide back into recession.
To his credit, Bush has spoken of attempting to address this issue by raising the cap on the Social Security tax to cover income over an individual's first $90,000. Unfortunately, Bush's vague talk of raising the tax cap does not constitute a real policy to pay for the funding liabilities of his Social Security plan. This talk is especially unconvincing given that the tax-cutting president is unlikely to pass an initiative that the Heritage Foundation termed to be "the largest tax increase in the history of the United States."
With this in mind, Americans should question the president's sincerity when he claims that his plan can be implemented without plunging the federal balance sheets further into debt than it has ever been before. Americans must demand that Bush either remove the caps on income taxation or find some other viable means of paying for his expensive plan to privatize Social Security.
Ultimately, if President Bush fails to find any serious source of funding for his plan, our generation will be the one that foots the bill.
Adam Keith is a Cavalier Daily associate editor. He can be reached at akeith@cavalierdaily.com.
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