Social Security: Begin With the End In Mind

It is time for President Bush to step back from his current proposal to shift revenues from the Social Security Trust Fund into private investment accounts and consider the goals he hopes to accomplish. The first, even before ensuring the future viability of Social Security, must be to do no harm to the long-term fiscal health of the government or the economy. Then comes ensuring the basic safety net that Social Security now promises. Finally, we should work toward the ownership society that the president envisions.

The reason it is important that we focus first on the fiscal health of the government and the economy is that if those fail, everything else becomes moot. If the economy founders, we won’t be able to fund Social Security, nor would ownership in such an economy do anyone much good.

That’s why I believe the president’s plan needs work. Under his proposal, we would redirect a portion of our current FICA taxes away from the Social Security Trust Fund and into our own private accounts. Now, many believe this will be good for the stock market and the economy as investments grow, but that view neglects the flip side of the equation.

That flip side is what the government will need to borrow to make up for the lost revenue that now flows into the Trust Fund. Since the government now borrows Trust Fund surpluses to fund its everyday expenses, it will have to borrow that lost revenue elsewhere. In fact, estimates are that the shortfall could be as high as $2 trillion. Two trillion is a big number, and there aren’t many investors with that kind of cash lying around.

In fact, take out the Trust Fund and the largest investors in U.S. Treasury securities are foreign countries, with Japan and China ranked one and two. Foreigners already finance nearly half our government’s debt (43.9 percent, to be exact), and those numbers are rising monthly. Borrowing an additional $2 trillion will require even more foreign investment, putting our economy dangerously at the mercy of foreigners who are beyond our control.

We got a hint of this danger last month, when the stock market had a brief panic at South Korea’s mere mention of possibly divesting part of its investment in U.S. federal debt – and they represent less than four percent of total foreign-held debt. If China or Japan ever get similar thoughts, we could see the equivalent of a run on the bank, where investors flee U.S. Treasury securities. The only thing that might stop such a run would be for the U.S. government to pay far higher interest rates on our debt.

What we’ve essentially done under such a scenario, is cede control of our long-term interest rates – and by proxy, our economy – to foreigners. That is not in our best interest. Nor would it be good for those private investment accounts.

That’s why I continue to endorse private accounts as a supplement to, rather than a replacement for, our current Social Security system. Yes, it would require politically unpopular sacrifice on the part of American workers, but I’m afraid we’re due for a little sacrifice. In the process, we’d protect our economy, reduce our dependence on Social Security as our investments grow and build the ownership society the president envisions, thus meeting all our objectives. How about it, Mr. President?