Opponents of Accounts Attack on Transition Costs

September 13, 2000

This week saw three attacks on personal retirement accounts by opponents who claimed that funding the transition to accounts would inevitably mean cuts in benefits. For instance, Henry Aaron, Bob Ball and Alicia Munnell wrote to Gov. Bush demanding answers as to how he would fund deposits to personal retirement accounts without cutting Social Security benefits to current retirees. "Over the next decade, those individual accounts will cost the trust fund at least $1 trillion. We believe the question is simple and direct: Where will the $1 trillion come from to protect Social Security benefits? We do not understand how you are going to keep your promise not to cut Social Security benefits for those at or near retirement, while diverting substantial payroll tax revenues into private accounts."

Economist turned columnist Paul Krugman made the same point in the New York Times last Wednesday: Bush "proposes to allow individuals to invest part of the money they currently contribute to Social Security, which will reduce the inflow of money into the Social Security system by $1.3 trillion over the next decade -- and that he insists he will not cut benefits. But if contributions are down, and benefits are not, where does the money come from?"

Even Social Security Commission Kenneth Apfel raised concerns that depositing money in personal accounts to pay benefits tomorrow would reduce the money available to pay benefits today. "The taxes that we all pay go to pay benefits to people," Apfel told the Associated Press recently. "If we take that money and you keep it in your own individual account, then how are we paying for your grandma? That's a real serious question."

These are serious questions, but the answers show that fears of benefit cuts are unjustified. If every worker had a personal account funded with two percent of his wages, deposits over the ten years from 2000-2009 would total $988 billion, based on data compiled by Social Security's Trustees. If only workers under age 50 took part, deposits would total approximately $800 billion. Between 2000-2009 Social Security will run payroll tax surpluses totaling $928 billion in cash and an additional $1.2 trillion in interest on the trust fund. In other words, we can easily afford to fund personal retirement accounts without cutting benefits by a penny. Grandma has nothing to worry about.

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