Who's Got The US Social Security Surplus?

by Mike Godfrey, Tax-News.com, Washington

28 March 2005

A report issued last week in Washington has focused attention on the trade-off between tax cuts (to build the economy) and social security 'private accounts' (to put the payroll tax surplus to better use).

The Social Security and Medicare Trustees' report showed that the payroll tax surplus will boost the Social Security "Trust Fund" from $1.7 trillion today to $3.9 trillion in 2014. The Trustees predict the payroll tax will continue to exceed benefits through 2017, but then the system will go into reverse, and the Fund will be exhausted by 2042.

It's comforting, isn't it, to know that the government has $3.9 trillion to back its finances in case of need? Oh, well, er, um, the fact is that the government already spends the money, every last cent of it, on non-social security costs. Perhaps it would be fairer to say that the Congress spends it on pork. Either way, it isn't there!

Now of course, if private accounts were instituted, and if they offered better returns than the state's feeble retirement scheme, then selfish insurance companies would actually demand to have the money allocated to the private schemes, reducing the payroll tax surplus and therefore reducing the contribution it makes to the general budget and therefore reducing the possibility of tax cuts.

If you wonder why the administration and the Congress are less than enthusiastic about private accounts, which are an economic no-brainer, now you know. But in a recent Federal Reserve Bank of St. Louis Review, Thomas Garret and Russell Rhine calculated what the return would have been to those who retired in 2003 if they had been allowed to invest the money they "contributed" to Social Security in an S&P 500 index fund or 6-month CDs. They found that over 99% of retirees would have earned a greater return by investing in the S&P 500, and over 95% would have earned a greater return by investing in 6-month CDs relative to the current Social Security system."

Federal Reserve Chairman Alan Greenspan at least seems to understand the dilemma, and in recent evidence before Congress, even moved in the direction of recommending tax increases. "It is the case that other elements of the tax cut were effective and instrumental in reducing the weakness that occurred in the economy in 2001, but they're no longer playing a role of any significance today.''

The President backs both tax cuts and private accounts, but seems to be leaving it to Congress to come up with a magic formula which will balance the books. History is not on his side.

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