Monday, November 3, 2008

Diamond: “Privatization puts financing at risk”

Peter Diamond, professor of Economics at MIT and an expert on Social Security, writes in today's Concord Monitor that Sen. John Sununu's proposals for Social Security reform aren't a particularly good idea:

According to the latest report from the Social Security actuary, without new legislation, the Social Security trust fund reserves will be depleted in 2041, so benefits will have to be cut by 22 percent. That is, payroll tax revenue will continue to be available to pay benefits and will cover 78 percent of the benefits that would be fully paid if there were enough money.

There are many plans to change Social Security to avoid this sudden drop in benefits. One of them, co-sponsored by Sen. John Sununu, the "Social Security Personal Savings Guarantee and Prosperity Act of 2005," reveals a lot about Sununu's approach to economic policy. This plan diverts part of the payroll tax revenue into individual accounts and calls for transfers from general revenue to Social Security to be able to continue paying full benefits. Apart from increased concern now with investing in the stock market, this plan severely increases the risk of an inability of Social Security to pay benefits.

With the large deficits projected for the federal budget, these proposed transfers to Social Security may not occur. If there are no transfers, then, according to the Social Security actuary, with the Sununu-Ryan plan, reserves in the trust fund are depleted and benefits would need to be sharply cut in 2020, two decades sooner than without this legislation.

The plan assumes that corporate tax revenue rises and government spending declines as part of the plan, with transfers from these assumed outcomes covering the transfers to Social Security. (The Social Security actuary does not evaluate such assumptions but just calculates Social Security finances as if the claimed assumptions hold.) But these revenue and spending changes may not occur. (How many proposals for capping government spending have you seen?)

If these changes don't occur, the plan calls for federal borrowing to finance the transfers to Social Security, greatly increasing the federal debt outstanding. By 2050 the additional federal debt to finance Social Security would be 93.7 percent of GDP. That would be enough to damage the ability of the federal government to borrow even if there are no other deficits, which there surely will be.

While saving Social Security has not been part of this year's election debate, the issue will still be there when the next Congress convenes. It is worth noting that Sununu's approach to Social Security reform would place at risk the finances of Social Security or that of the entire federal government.

I'm not a big fan of the Sununu proposal, for many of the reasons cited here, and would prefer an approach that doesn't rely so much on revenues from outside Social Security, which may or may not materialize. That said, this op-ed is clearly geared toward the election – Sen. Sununu is in a tight race with former New Hampshire government Jean Shaheen – and it's not as if Govt. Shaheen has offered anything near as specific as Sununu's plan. In other words, the only reason Diamond is able to criticize Sununu is that Sununu had the guts to put his ideas on the table – warts and all. It would be nice if all candidates from all parties were so forthcoming.


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