Social Security Alteration
When President Bush plan to run again for candidacy everyone in Wall Street to Main Street is now questioning about the financial impact of Social Security personal accounts reform. Allowing employees to deposit part of their payroll taxes into personal accounts would draw off revenues currently used to pay retiree benefits payments that consequently would require larger federal borrowing. Besides, the government may issue marketable recognition bonds to personal account participants reflecting benefits accrued from their earlier payroll taxes. By how much will federal debt held by the public increase and how will financial markets be affected constitute todays $10 trillion questions.
The viewpoint of an enormous increase in U.S. federal debt appears daunting. Closer reflection, still, reveals that the concerns about a negative impact are overblown. Presume that half of total payroll tax revenues $300 billion in 2005 are redirected into private capital markets. The government would then have to borrow only an additional $212 billion to continue paying current retirees their benefits. This is because payroll taxes are projected exceed Social Security outlays in 2005 by $88 billion an amount that the government won't have to make use of in order to meet benefit commitments. As a result, more funds could be added into private markets through personal accounts than withdrawn through government borrowing. This would remain true until payroll tax surpluses are projected to last through the year 2018.
Future Social Security benefit responsibilities are not presently shown on official U.S. federal budget reports and therein lies the value of such a reform. U.S. policymakers have lately shown a proclivity to amassing unfunded obligations under a shortsighted view of their size, for instance Medicare prescription drugs. The conversion of unreported responsibilities into explicit recognition bonds will reveal that federal indebtedness is much larger than is apparent under current accounting conventions. Even if this does not lead to a reduction in projected non-Social Security spending, it may constrain political incentives to further escalate such spending. And any reductions, if they occur, would increase government saving ultimately improving the nations capacity to pay off its obligations.
A significant reduction in unfunded obligations in this manner will also reduce the risk of premiums built into private equity returns: Such a reform will determine early the uncertainty about future tax and benefit changes, by this means instilling greater confidence in the stability of a low-tax and growth oriented fiscal policy environment.
A properly designed Social Security reform that resolves future uncertainties early, provides reasonable regulations against excessive risk taking, and does not replace today's over commitment of Social Security benefits with a similar over commitment of retirement income guarantees under personal accounts could boost national saving, improve the operation of capital markets, and increase economic growth. Ill-conceived measures and delays, however, could have the opposite effects.
