Conrad Supports Personal Accounts, but Demands Budget Include Money For Them

April 30, 2001

There has been speculation in the past on Democratic Sen. Kent Conrad's (D-ND) possible support for personal retirement accounts. In an article published April 25 in the political newspaper The Hill, Conrad, the ranking Democrat on the Senate Budget Committee, was more explicit in his support than in the past. But Conrad favors funding these accounts using general tax revenues rather than a worker's own payroll taxes, resulting in a confusing means both of pre-funding Social Security accounts.

Conrad warns that Social Security and other programs for the elderly pose a significant challenge to the Budget, but argues that President Bush's budget hasn't met that challenge:

"There are no easy answers to this looming fiscal problem. But unlike the president's plan, which makes the problem worse, the Democratic budget proposal acknowledges the problem and sets aside $750 billion of projected surpluses towards a solution."

On the contrary, Conrad says, the Democratic budget's smaller tax cut leaves greater room for fundamental Social Security reform:

"This money could be used to develop individual retirement accounts similar to the Thrift Savings Plan accounts held by all federal workers or to fund other proposals to strengthen Social Security and aid in the shift to a sustainable retirement program for our nation. We know that nearly every plan that has been proposed to strengthen Social Security would require the use of additional funds and it only makes sense to begin to set aside the resources that we will need."

Conrad is correct to endorse personal retirement accounts and correct that Social Security reform will require resources. (It is arguable, however, that the Bush budget does provide such resources.) Nevertheless, it is curious that Conrad argues that the budget should reserve the entire Social Security surplus for debt reduction while funding Social Security accounts out of the on-budget surplus. In fact, it should be the other way around. Here's why:

From an economic perspective it makes no difference whether on-budget surpluses are used to increase savings for Social Security through personal accounts and Social Security surpluses increase on-budget savings through debt reduction, or vice versa. After all, a dollar saved is a dollar saved.

But there is a great virtue in what economists call "transparency," which means that an ordinary person can figure out what the heck is going on.

Social Security has long suffered from a lack of transparency: "accounts" that don't exist, trust fund assets that are actually debts, and so on. It only confuses the issue further to insist use Social Security surpluses to repay debt (which was accumulated by non-Social Security spending, and the reduction of which will benefit the non-Social Security part of the budget) while devoting only non-Social Security money to Social Security-based personal accounts. Why not use Social Security surpluses to fund personal accounts for Social Security, and on-budget surpluses to repay debts run up by on-budget spending? It seems simple, and it is.

Moreover, doing so creates clear lines between Social Security and the rest of the budget. If Social Security taxes are saved in accounts just for Social Security, workers will have more control over them and greater confidence in their retirements. Likewise, if debts created by overspending in on-budget programs must be retired using only on-budget surpluses, then future politicians might consider their spending options more carefully.

Nevertheless, Conrad is clearly onto something: Social Security indeed faces serious challenges, and these challenges can be met by turning individual workers into individual savers through personal retirement accounts.

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