Gore’s Social Security Plan Doesn’t Add Up . . .

by Sylvester J. Schieber

November 4, 2000

In the last presidential debate, Al Gore told us that George W. Bush intends to take $1 trillion out of the Social Security trust fund and put it into young workers’ individual accounts while also using that same $1 trillion to pay benefits to current beneficiaries. Mr. Gore implies that Mr. Bush’s plan uses smoke-and-mirrors funding, because it spends the same $1 trillion twice.

Meantime, Mr. Gore suggests that he has invented a way to guarantee Social Security benefits without incurring the costs of a Bush plan. Mr. Gore would do this by issuing the Social Security trust funds more than $1 trillion in new bonds, which he claims will extend the life of Social Security to at least 2054.

The source of these bonds is not revenue from new taxes or other financing mechanisms. Mr. Gore is simply going to switch on the government printing presses at the Treasury Department. The underlying rationale for issuing these bonds is that federal interest payments will be reduced if his plan to pay off the federal debt is realized. Under Mr. Gore’s proposal, however, paying down the debt will not relieve us of interest costs. Mr. Gore would continue paying interest on the current debt in the form of the added government bonds that he would issue to the Social Security trust funds.

Under a version of the Gore proposal that has been evaluated by the Social Security actuaries, the Treasury Department would issue added government bonds to the Social Security trust funds of $122.4 billion in 2011. In following years, additional bonds would be issued to the tune of $145 billion in 2012, $169.8 billion in 2013, $196.7 billion in 2014, $225.7 billion in 2015, and $257 billion a year in 2016 and beyond. The added Gore bonds issued to the trust funds between 2011-16 would add up to slightly more than $1.1 trillion. Including interest of 7% a year, Mr. Gore’s proposal would add $1.3 trillion to the trust funds.

The beauty of the Gore proposal -- from an inside-the-Beltway perspective at least -- is that it has no effect on the budget during its early years. Delaying the issuance of the bonds until 2011 conveniently takes the proposal’s funding outside the 10-year budget window used for evaluating current policy proposals. Moreover, when the bonds are issued, they will simultaneously create a cost entry to the general budget but an identical offsetting income entry to Social Security, leaving the combined federal budget unaffected. Given the way federal accounting works, this proposal is nothing more than a paper transaction for the next 20 years or so.

Eventually, though, the bill will come due. Starting in about 2020 under the Gore plan, the Social Security trust fund will have to start cashing some of the extra bonds it receives. There are a very limited number of ways to pay off these bonds, and they all either result in higher taxes, bigger budget deficits or reduced government services.

Policymakers could raise taxes, but do we want to impose higher taxes on our children than we are willing to pay? Or policymakers could refinance the bonds by borrowing from the general credit markets, but do we want to return to an extended period of deficits like those of the 1980s and much of the 1990s? Some future administration could cut government expenditures, but where? Mr. Gore hasn’t said whether he would have us spend less on defense, education, highways or farm programs. The only other means of keeping Social Security in balance would be cutting benefits -- but Mr. Gore says his plan guarantees benefits until at least 2054.

If Mr. Bush were to use Mr. Gore’s proposal to finance his individual accounts, it is not clear how Mr. Bush’s proposal would cost any more than his opponent’s. Mr. Gore, the master of facts, has told us the Bush plan will cost an extra $1 trillion. For the sake of argument, let’s assume that Mr. Gore is right: Mr. Bush must finance his individual accounts from the Social Security trust funds, and it will cost $1 trillion. But if Mr. Bush were to use some of Mr. Gore’s $1.3 trillion worth of bonds to finance his individual accounts, then his proposal would cost less than the vice president’s. In fact, it would eventually cost much less, since it has the potential to provide solid funding to the bottom tier of our national retirement system.

Why has Mr. Bush proposed to begin funding accounts for young workers? If a 21-year-old worker saves a consistent portion of her salary until she retires, most of her accumulated benefit at retirement will be from earned interest. Even under conservative assumptions, her earned interest could easily be as much as 70% of her total benefit at retirement. Funding retirement benefits for a broad sweep of middle- and upper-income workers has the potential to pay tremendous benefits to our economy by reducing the amount that workers must contribute to retirement benefits via their payroll taxes.

If we were to issue Gore bonds to workers so that they could open their own retirement accounts under a Bush-type of reform, it would cost money right now, which Mr. Gore’s approach does not. But it would not change one iota the true, long-term cost of these bonds. If we finance these accounts using some of the current budget surplus, we can convert that surplus into savings in the hands of millions of U.S. workers. It is much less likely that future presidents or congresses could raid those accounts than if the surplus remains in the hands of the government, where it must compete with other worthy causes. Thus, the Bush approach has more potential to create real savings and associated benefits than the Gore plan.

The big problem with the current debate over Social Security is that Mr. Gore is demanding that Mr. Bush provide a detailed cost accounting of his proposal without having done so himself. If I were George W. Bush, I would say to Al Gore: “I have laid out how I intend to finance my Social Security reform proposal. But if you prefer, I’m willing to use your bonds to finance my Social Security reform plan. By your own accounting, Mr. Gore, my bonds will cost no more than your bonds and may cost less. I will also consider using your proposed method of paying for those bonds as soon as you tell us what that is.”

This article appeared in the Wall Street Journal on November 1, 2000.

Scheiber is vice president of research at consulting firm Watson Wyatt and co-author with John Shoven of “The Real Deal: The History and Future of Social Security” (Yale University Press, 2000). Scheiber was as a member of the government’s 1994-1996 Advisory Council on Social Security, which examined the Social Security problem and proposed solutions based on pre-funding of the system.

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