In mid-September, the Washington Post’s Mike Allen wrote that President Bush’s “proposed changes in Social Security to allow younger workers to invest part of their payroll taxes in stocks and bonds could cost the government $2 trillion over the coming decade, according to the calculations of independent domestic policy experts.” Several gullible commentators took up this line. Social Security reformers have been scratching their heads ever since, trying to figure out how the $2 trillion figure was derived. It’s a much higher figure than anything they had seen before.
The Kerry campaign has distributed a spreadsheet to some reporters that makes it clear how the number was reached.
It turns out that the Kerryites make four assumptions.
The first is that Bush goes with a particular reform plan that was among a set of three that his Social Security commission listed as options.
The second is that in financing the creation of personal savings accounts, the government relies totally on borrowing. That’s a defensible assumption–it could happen that way–but it allows the Kerryites to add interest costs to the total. The result is not so much the cost of personal accounts but the cost of a particular way of financing them.
The third is that everyone who can open a personal account does so. That’s a much less likely assumption. The Social Security administration’s actuaries have assumed a 67-percent participation rate, not a 100-percent rate. Presumably some people are going to be scared off by the claim that personal accounts are risky and will leave them behind–which is, after all, the Kerry campaign’s own talking point. They’re saying that personal accounts are terrible, a lousy deal, and everyone is going to want one.
Fourth, they use outdated estimates of future GDP and inflation to make the cost higher. They are, remember, trying to figure out the cost of reform over the next ten years. But they use projections for the economy from 2005-2014 that were made back in 2001. Using those old projections, instead of up-to-date ones, inflates the cost estimate. Maybe that’s just sloppiness on the Kerryites’ part, but it’s hard to imagine that they didn’t know what they were doing.
Eliminate assumption three, and use up-to-date figures in place of assumption four, and you get a result that’s about half of what Allen reported.
But the terminology of “transition costs,” even at a $1 trillion estimate, is misleading. Social Security is supposedly going to pay for the retirees of today and those of tomorrow. The “transition costs” arise because the government would be setting aside money for personal accounts for tomorrow’s retirees while also sending checks to today’s. But the total long-term obligations of the Social Security system would not increase. Under a properly structured reform plan, they would decrease: People would accept a smaller government check in return for the prospect of a better return on their money. Moving to personal accounts may pose a financing problem, but it imposes no costs. A well-structured reform proposal that includes personal accounts will save taxpayers money.