Saving the Surplus, or What’s Left of It…

Jack Kemp has a new op-ed promoting a book by Denny Smith and Peter Ferrara entitled "Stop the Raid," which promotes personal retirement accounts as way to keep Congress from "raiding" the Social Security surplus to spend on other things. As Kemp explains,

[I]n 2007, 88 percent of total Social Security tax income was spent immediately for current benefits and expenses, leaving a surplus at $80.3 billion. What happened to that surplus money? The federal government borrowed it and spent it on general budget expenditures. In return, Social Security got Federal IOUs, which promise to pay the money back, with interest. Over the next five years, from 2008 to 2012, the federal government will continue to raid (borrow) another $410 billion from the Social Security trust funds.

Using personal accounts to "save the surplus" is a very attractive – perhaps the most attractive – argument for them, as they could stop a practice most Americans agree is dishonest and harmful to their future retirement security. Saving the surplus, far more than potentially higher rates of return or even a simple ownership argument, is probably the best way to sell personal accounts to typical Americans.

I've used that argument myself, and in the past I think there was a lot of substance to it. Had we saved the Social Security surpluses generated since the 1980s, we would be sitting on a $2.5 trillion pool of assets with which to pay Social Security benefits rather than merely a stock of government bonds that will be repaid by raising taxes on ourselves in the future.

That said, it's a basic rule of economics that we make decisions at the margin: what matters is what we can do going forward, not what we could have done in the past. And the sad truth is that we've put off Social Security reform for so long that there's really not much of a surplus left to save.

Between 2008 and 2016 – the last year in which Social Security is projected to be in positive cash flow – cash surpluses will total around $462 billion in present value (assuming a 2.7% real interest rate). That's a good chunk of change, no doubt.

But many people act as if saving the surplus would be sufficient to fix Social Security, or at least make a good sized "down payment on reform." Social Security's total long-term shortfall equals roughly $13.6 trillion in present value, meaning that even if we saved every penny of the surpluses going forward it would amount to only around 3 percent of the total shortfall. Not much of a down payment. Moreover, given the political economy of things, it's likely that even if that surplus were saved in personal accounts through 2017, the government would make up most of it through increased borrowing. So the net take would likely be less than 3 percent.

Now, 3 percent is better than nothing, and a lot further than Social Security reform has gone to date. But even accounts to save that modest amount would demand vast amounts of political capital, almost surely more than the reform movement has at this point. While accounts have a role to play – an important one, in my view – to be viable that role, and how the accounts would be financed, should be fleshed out in more detail than in a simple "save the surplus" approach.