Social Security Reform, With Interest
Doing Jim DeMint's proposal one better.


Phil Kerpen

An article last week on NRO referred to me as a critic of Sen. Jim DeMint’s proposed Social Security legislation. I am not. In fact I think DeMint should be praised from the highest rooftops for his leadership on the issue. As Larry Hunter and I made clear in a recent guest comment on this site, stopping Congress from raiding the Social Security surpluses and instead dedicating those surpluses to personal accounts — as DeMint proposes — is the best possible compromise in the current political environment.

Yet as great as the DeMint plan is, it could be better. The most significant step that could be taken to improve the bill would be to dedicate interest from the Social Security trust fund, along with the cash surplus, to personal accounts, as DeMint himself would prefer to do. Including the interest would not, as some have alleged, increase the deficit or the national debt.

The interest is already scheduled to be paid to the Social Security trust fund. Paying that interest by issuing bonds to personal accounts simply means moving some debt from the intergovernmental column to the held-by-the-public column. If we take seriously the obligation to pay benefits to future retirees — and almost everyone does — then the debt in the trust fund is every bit as real as the debt held by the public. From Congress’s perspective, the debt that’s subject to the statutory debt ceiling, which includes intergovernmental debt as well as debt held by the public, would be unchanged.

One potential roadblock to including the interest in a reform package is that the bureaucrats who calculate annual deficits, by convention, include the issuance of marketable bonds as outlays that would increase the deficit. (The bonds in the accounts would be real, marketable bonds — not the “special issue,” unmarketable IOUs in the trust fund.) But in this case that convention makes no sense. The bonds, in being marketable, do not cost the government anything. When people sell the bonds they will be paid for by whoever buys them — not the government.

The interest would also increase the size of personal accounts dramatically. In fact, adding in the interest is the difference between having very modest accounts that peak at only 1.8 percent of payroll and having full 4 percent accounts. Four percent accounts happen to be the size preferred by President Bush, and would be a significant step toward more fundamental reform. As the table below shows, over the next ten years this difference would mean real money to the 160 million or so workers paying Social Security taxes.

All of this comes back to the duplicity surrounding the trust fund. The people who raise the cost objection pretend that making interest payments to the current trust fund doesn’t cost anything while paying that same interest into personal accounts would. This is the same double-speak that tells us the trust fund is real when Social Security’s so-called solvency is being projected, and fictional when it comes to the federal budget and Congress’s desire to spend the surplus. Ending this duplicity is one of the primary goals of Sen. DeMint’s admirable legislative proposal, which is why I offer this friendly suggestion: Give workers back the surpluses, with interest.

Phil Kerpen is policy director for the Free Enterprise Fund.