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Social Security Reform Thursday: Week Twenty-Seven -- The Cost Of Doing Nothing.

Thursdays are good days for reform, because they fall between Wednesdays and Fridays.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

This week's topic:

The High Cost Of Social Security's Status Quo.

Critics of Social Security reform like to harp on the alleged trillion dollar "transition" costs of the system. They say it's just too expensive to introduce personal accounts. They are lying, or ignorant, or both.

Social Security already has built-in costs over the short-, medium-, and long-term time frames. President Bush's reform ideas do not pile on additional new debt onto the Social Security system; indeed, recognizing existing obligations and paying them off sooner rather than later actually eases the Social Security crisis.

Let's take yet another look at a contributing problem to Social Security's insolvency (.pdf):

Over the next quarter century, the number of American workers will rise by about 13%. Meanwhile, the number of retirees will increase by 90%, roughly 7 times faster.

There is little room left for debate on the Social Security's problems. Whether you want to quibble about whether Social Security faces a crisis or a looming/potential crisis, there can be no mistaking the structural flaws currently in the system.

But even worse is what doing nothing would cost the American economy. As Harvard economist (and short-list candidate to replace Alan Greenspan) Martin Feldstein noted:

A number of research studies have been done on the extent to which Social Security wealth depresses saving and replaces real wealth. Although none of these is a definitive study that establishes a precise measure of the substitution of Social Security wealth for other household wealth, taken together these studies do imply that the Social Security program causes each generation to reduce its savings substantially and thereby to incur a substantial loss of real investment income. Even a conservative estimate that each dollar of Social Security wealth displaces only 50 cents of private wealth accumulation implies that the annual loss of national income would exceed 4 percent of GDP....

Conservative assumptions imply that Social Security privatization would increase the economic well-being of future generations by an amount equal to 5 percent of GDP each year as long as the system lasts.

That's a huge handicap, and a gi-normous misssed opportunity.

We're tying one hand behind our backs with our current Social Security system. In a fight with China and other emerging economies, it would be nice to have both economic fists available.

But what about the Trust Fund? Won't it take care of our problems?

No, for two main reasons.

1. The Trust Fund is being raided and spent by Congress on bridges and stem cell research and war and welfare and other programs and projects entirely unrelated to retirement security.

2. Even if the Trust Fund were more than a series of IO-Me slips from the government to itself, sitting in a filing cabinet in West Virginia, the trust fund does not have enough to cover Social Security's liabilities.

An important figure to remember in the Trust Fund debate (.pdf):

The associated federal resource shortfall—that is, the shortfall including federal liabilities to the Social Security Trust Fund—amounts to $12.8 trillion. Those estimates have received little attention in the media—presumably because many people do not appreciate their meaning or implications. Simply stated, the federal government must come up with $12.8 trillion of resources for Social Security—either from the Social Security program itself—by reducing its future benefit commitments—or from other programs—through tax increases or spending cuts.

Ouch.

Very ouch.

One likely solution, knowing the propensity of Congress to avoid cutting benefits to a key constituency in every district in the land, is to raise payroll taxes yet again (.pdf):

So, if we are to believe that "there is no crisis," we will likely see payroll taxes increase by more than 5 percentage points, with no end in sight.

And it's really so stupid to do that, given that we have an opportunity to avoid it. We can do better. Let's do it.

Bottom line (.pdf):

The current annual cost of maintaining the status quo in Social Security is staggeringly higher than the present value of the 10-year cost of adopting personal accounts.

Every year we fail to reform Social Security, the cost grows by hundreds of billions of dollars. There's no excuse for doing nothing. The cost is simply too high.

The clock is ticking.

Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Will Franklin · 4 August 2005 01:52 PM

Comments

Posted by: Zsa Zsa at August 4, 2005 04:40 PM

Posted by: Zsa Zsa at August 5, 2005 01:36 PM