Illusions of a Vault

November 6, 2002

An article by E. Thomas McClanahan in this week's Kansas City Star deconstructs the rhetoric surrounding the so-called "Social Security trust fund vault."

McClanahan writes that he has been receiving campaign leaflets from the Democratic Party this year and, "The most fascinating leaflet shows a picture of a bank vault. The vault is labeled, 'Social Security Trust Fund.' The next picture shows a pair of dice. The caption asks voters if they want a 'guarantee' (the vault) or a 'gamble' (the dice)."

He continues, "Of course, the ad doesn't show the inside of the trust-fund vault. That's because it's empty, and Democrats don't want voters to know this. Well OK, not totally empty. It's stuffed with Treasury bonds, but they're essentially worthless. They can't be redeemed without cutting benefits or raising taxes, which is what you'd have to do if they didn't exist. So the vault might as well be empty. To anyone who understands this, the vault in the picture looks almost as risky as the dice."

The essence of the problem in the current Social Security system is the funding scheme it uses, writes McClanahan. "In the future, there will be fewer workers to support a larger pool of retirees. Unless the system is reformed, enormous tax increases will be needed to cover benefit checks. But younger workers won't take this lying down, and their resistance will change the politics -- and undermine the political 'guarantee' that backs up Social Security. So all this fear-mongering about 'privatization' is politics at its worst, meaning Democrats are putting out a message that only works with uninformed voters."

According to McClanahan, in order to avoid massive tax increases and/or benefit cuts, a fundamental change is needed in the system. "First, we need a mechanism that allows some part of the payroll tax to be set aside for the future. Under current law, the government has no way to save, as the word is commonly understood. This year's money is spent this year, period. Second, we must decide what sort of saving mechanism would be best. The logical answer is a diversified portfolio of stocks and bonds. Even the Clinton administration conceded this point and briefly trotted out a plan in which a government panel would decide what securities to purchase. But then people began asking: Do we really want Uncle Sam buying up shares and becoming the largest single owner of America's industrial capital? That led to personal accounts -- allowing workers, if they choose, to shift some of their payroll taxes into financial assets they would own."

McClanahan concludes, "For those who claim the personal-accounts idea is politically dead because of the recent carnage in the stock market, there are two responses:

• If you're 15 or 20 years from retirement, a bear market is the perfect time to buy.
• OK, if personal accounts are off the table, what's your suggestion for saving Social Security?

"Soon we'll have to open the trust-fund vault and redeem the illusory 'bonds.' Let's hope that long before then, voters will see through these Democratic scare tactics and support candidates willing to put Social Security on a more stable foundation."

2005 Index | 2004 Index
2003 Index | 2002 Index | 2001 Index
2000 Index | 1999 Index | 1998 Index