Yes, yet another Social Security post. But, hey I don't make the news. Today's motivation is this NYT article, which I am going to use an excuse to offer my view regarding those issues in the reform debate that are essential, and those that are red herrings.
Point 1: An increase in the deficit is not equivalent to a lack of fiscal discipline. From the Times article:
Many Democrats say that the costs associated with setting up personal accounts just make Social Security's financial problems worse, and that the United States can scarcely afford to add to its rapidly growing national debt...
"The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," [director of the White House's Office of Management and Buddget Joshua] Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."
Either of these positions could be right, of course, depending on the details of the policy. But a basic truth is that Social Security's financial problems relate to the flow of payments and revenues over time. Otherwise, everything would be just perfect as it stands, since Social Security revenues currently exceed benefit payments (and will for several years to come). Whether the deficit (on the books of the Social Security system or the government more generally) increases as a result of any particular reform program is quite beside the point of whether the system is in balance or imbalance. What matters is what the policy implies for the present value of payments and receipts.
A corollary: The discussion of what happens to current tax collections is beside the point.
Borrowing by the government could be necessary to establish the personal accounts because of the way Social Security pays for benefits. Under the current system, the payroll tax levied on workers goes to benefits for people who are already retired. Personal accounts would be paid for out of the same pool of money; they would allow workers to divert a portion of their payroll taxes into accounts invested in mutual funds or other investments...
But the White House has never answered fundamental questions about Mr. Bush's plan. In particular, it has not explained how it would deal with the financial quandary created by its call for personal accounts.
Fair enough, but the important quandry has virtually nothing to do with the balance of receipts and outlays in the short run. It has everything to do with the long-run strategy for matching the present value of receipts and outlays over decades and decades into the future.
Point 2: All debt is created equal.
Opponents of Mr. Bush's approach say that Social Security's financial problems can be dealt with more easily without the addition of personal accounts, and that any large-scale borrowing would erase the presumed economic advantage of establishing the accounts: spurring more national savings, a goal that nearly all economists agree is worthy and important. Any increase in private, individual savings, they say, would be partly or wholly offset by an increase in public debt.
The idea here is that deficits by themselves encourage more spending. Whether this is so is a longstanding matter of controversy among economists. But if there is a circumstance in which it may not be true, this is surely it. Take, for example, something akin to the Chilean reform program. For purposes of this discussion, there are two essential parts. First, workers who opt-in to a private saving account agree to forego the accumulation of any further publicly-provided pension benefits. Does the deficit go up? Sure. Revenues that were previously available are no longer there. But down the road, when previously promised benefit liabilities would have come due, there are none. What's the problem?
The second, related, element of the Chilean reform was the creation of "recognition bonds" that gave workers a credit for accumulated benefit promises if they opted out of the state-provided pension system into private retirement accounts. These bonds added to theexplicit public debt, but what did they change in reality? Did they not simply "recognize" the liability that existed under the existing social security system. All that happened was that an explicit (in Chile's case, marketable) debt instrument was substituted for an implicit one. As long as the value of the bonds equal promised benefit payments in present value, this sort of transfer from "off-the-books" to "on-the-books" makes absolutely no difference to the government's long-run budget balance.
Furthermore, this transaction should make little difference to workers. The debt created by recognition bonds does not really change the private sector's wealth. Though it might be argued that explicit bonds are more certain than promised benefits from the holders' point of view, and affects private spending decisions through that channel, I'd argue that this is not what most of the participants have in mind when obsessing on the deficit.
Point 3: Accounting is already creative.
In an effort to pressure the White House to acknowledge some of the financial trade-offs in its approach, Democratic leaders in Congress this week asked Mr. Bush to include in his next budget an accounting of the money that would be needed for his Social Security plan.
Only by including such figures in the budget, the Democrats said in a letter to Mr. Bush, "will Congress and the American people be able to weigh the difficult trade-offs between large-scale borrowing, Social Security benefit cuts, tax increases, and other spending reductions that may be required to fund your Social Security private accounts proposal. "
I'm all for that, but if we are going to do it we ought to fairly account for the true magnitude of the "debt" under the status quo as well. A start would be to use so-called generational accounts -- which summarize the government's fiscal balance in terms of future, as well as current, reciepts and outlays -- as a benchmark.
This is, in fact, the basis of each point I am making. The deficit is, pure and simple, a pretty poor basis on which to evaluate the pros and cons of any fiscal policy. What matters is how much we spend and what we spend on, how we collect the revenues and who we collect them from, over the long haul. Debate about the short-run deficit is a diversion from the important business.