By James D. Agresti
November 25, 2011
During the recent one-on-one debate between Newt Gingrich and Hermann Cain, Gingrich said, “If you take it off-budget, you could solve Social Security. You take what’s in that [Trust] Fund, and you model it on what’s in Chile, you find with a few modest cuts in spending you get to a stable retirement program.”
As explained earlier, taking Social Security “off-budget” doesn’t affect its finances one way or another. However, there is a more important aspect of Newt’s statement that calls for scrutiny. Although proposals to give Social Security an element of personal ownership are generally structured to improve the program’s finances, the unfunded obligations already amassed under the current system are so large that the cost savings of such reforms are not enough to make the program “stable.”
For example, in 2008, the chief actuary of the Social Security Administration projected the financial effects of a personal ownership proposal made by Republican Congressman Paul Ryan. He estimated that the plan would eliminate $4.3 trillion in unfunded obligations but also require $4.1 trillion in transition costs. This amounts to about $200 billion in total savings or about 5% of the program’s 75-year open group unfunded obligation. In other words, the cost savings in the plan are 5% of what it would take to make the program stable for the next 75 years.
The U.S. Social Security system is presently dependent upon current workers who pay taxes that the program gives to current beneficiaries. Transition costs arise when current workers are allowed to save some of their Social Security taxes for retirement while the program continues to pay current beneficiaries. In Chile, which transitioned to a personal ownership system in 1980, these transition costs equaled an average of 3.25% of the nation’s GDP each year from 1981-1999 (pages 47 and 51).
So where does this money come from? The government must get it from other sources, which Newt neglected to mention in his statement above. Nor is this mentioned in the FAQs about his personal account plan on his campaign website. It is explained in Newt’s just-released 50-page position paper on Social Security but not until page 20. As detailed in this paper, Newt proposes to obtain this money through spending reductions from “other entitlement reforms.”
Politicians on the left sometimes rail about the transition costs of Social Security personal accounts while ignoring the fact that the costs of keeping the current system afloat are even greater. Meanwhile, as we have seen, politicians on the right sometimes speak about personal ownership as if it were a silver bullet that can singlehandedly cure the system of its financial ills.
An honest accounting requires that we consider both the costs and savings of changing Social Security to a personal ownership system. Again, personal accounts typically save the program money but not enough to bail it out of the mess it is in. To do this, other measures are necessary.
For comprehensive and meticulously documented facts about personal ownership proposals, visit Just Facts’ research on this topic.