Bush’s Social Security Plan Adds Up

November 2, 2000

Milton Friedman, a senior research fellow at the Hoover Institution and 1976 recipient of the Nobel Prize in Economics, published the following in the Nov. 1 Wall Street Journal.

During the next 10 years, Social Security receipts are estimated to exceed payments to Social Security recipients by $2.4 trillion. George W. Bush proposes to use about $1 trillion of that sum to finance personal retirement accounts for young workers. Does that, as Al Gore’s campaign contends, “undermine Social Security” by promising “the same $1 trillion of Social Security to younger workers and the elderly at the same time”?

Not at all. Under current law, the surplus will be used to purchase back government bonds now privately held. Those bonds will constitute assets of the “trust funds,” counted on to finance future payments. They can be converted to cash only by selling them back to the market. Under the Bush plan, $1 trillion of those assets will instead be held in the form of securities in personal retirement accounts. Does replacing government IOUs with private securities weaken Social Security? Quite the opposite.

The Bush plan does not affect the benefits promised to current retirees. For younger workers, the account will finance part of what otherwise would be an obligation of the trust fund. In addition, the higher yield on the personal retirement accounts will benefit both the retirees and the Social Security trust fund.

In effect, the establishment of personal retirement accounts would convert an unfunded liability of $1 trillion into a fully funded liability, which strengthens rather than weakens Social Security.

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