March 03, 2005
Thursday

A tax tweak here and a tax tweak there and pretty soon Social Security will be fixed, say any number of economists and pundits who would have done us all a favor if they had completed their homework and understood, for beginners, that one of their basic assumptions is a lie.

The fact is, Social Security is a crisis waiting to happen in about 13 unlucky years, because that's when the revenue from the payroll tax that pays for it will no longer be enough to do the job. Well, chuckle the complacent commentators, that is the point we will start taking money from the trust fund. Tap these people on the shoulder, somebody. Get their attention, and then repeat to them several times: There is no trust fund, there is no trust fund, there is no trust fund.

By any honest definition of the term, a trust fund is a store of wealth - of assets in one form or another - that you eventually will be obligated to turn over to another party or parties. In this case, the trust fund is a lick and a promise, an accounting device, an IOU.

Over the years, you see, the payroll tax has generated a surplus eventually to be used to pay benefits to Social Security recipients. But the money - the so-called trust fund - has not been saved. It has been spent on other programs. When it comes time to lay its hands on it, the government will not open a vault somewhere and haul the dollars out. It will have to tax or borrow or some combination of the two, and the implications are far reaching, very far reaching, trillions of dollars worth of far reaching.

You begin to grasp as much when you read about economists telling us that a payroll tax increase of 2 percentage points amounts to a 75-year fix for the system. That hike does not take account of the $1.5 trillion owed the system from the so-called trust fund. Add that to the $3.7 trillion that the tax hike would generate, and you come to a need for $5.2 trillion. Understand, too, that the $5.2 trillion figure is an estimate of what it would take to finance the system if the money were received as a lump sum and immediately invested at a return over the years of 3 percent. The actual net cash shortfall over the next three quarters of a century is some $27 trillion in constant dollars, think tank experts say.

The 2 percentage points solution also assumes that the surplus generated between the enactment of such a hike and crunch time would be available without still another tax hike. The truth is that repairing Social Security through tax hikes would be a never-ending process that ultimately repairs nothing. The solution also fails another reality test, namely that once you supply all the payroll tax revenues to Social Security, you have to figure out how to finance all those dozens upon dozens of other programs - including defense - that have relied in part on those surplus dollars.

We'll be looking at tax increases for them, too, or else deficit spending so great as to be an economy killer. This run-for-the-hills circumstance won't wait 13 years. As more and more of the total payroll tax goes to Social Security, the current $160 billion annual surplus will shrink to less and less for non-entitlement or discretionary spending.

Some still shrug their shoulders, saying Medicare is the real problem we face as baby boomers start to retire, not Social Security. They're right that the Medicare issue is more complicated and expensive to solve, but it hardly follows that the Social Security calamity is lessened, only that it is compounded. The combined deficits of these two programs 35 years from now would require 60 percent of all income taxes on top of payroll taxes, says David John, a research fellow at The Heritage Foundation.

More is needed as a remedy for what afflicts Social Security than President Bush's proposed personal accounts, as even he acknowledged in his State of the Union speech. He did not go on to say that means testing for those several decades from retirement will be required, but it almost certainly will be. As for the personal retirement accounts, they would be for young people, they would be voluntary, they would leave a safety net for those who opted for them and they would give many people an opportunity to accumulate significant savings that they do not now have. The chief negative is that some costs that would otherwise come late in the game would come soon. The chief plus is that the accounts could eventually make Social Security sustainable without continuous reversion to finally ruinous taxation.

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