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Personal saving accounts will reduce future burdens

URBANA, Ill. — In the final presidential debate and on the campaign trail since then, Sen. John Kerry — who himself has no plan to safeguard Social Security — attacked President Bush's plan to let workers invest part of their payroll taxes in personal savings accounts.

His primary criticism, and indeed the leading bullet point in political attacks against responsible reform of Social Security, is that the shift to personal accounts involves large "transition costs."

This line of political attack completely misses the point. The "transition costs" are not new costs at all, but rather a way to reduce the burden on future generations by paying off part of the $10.4 trillion liability that Social Security is poised to heap upon our children and grandchildren.

A better label for saving more today to reduce future liabilities is "transition investment." The transition-investment issue is actually quite simple.

Today, most of the payroll taxes paid by American workers are immediately paid out to today's retirees; very little, if any, of the money is saved for the future. Such a pay-as-you-go system worked well back in 1950, when we had 16 workers paying taxes to support each retiree. But when the ratio of workers to retirees falls to only 2 to 1, as it will within a generation, such financing will require substantial tax increases to support the currently scheduled benefits.

In short, the pay-as-you-go financial structure of Social Security, designed in the depths of the Great Depression, is now crashing headlong into America's demographic destiny.

President Bush wishes to reform the system to rein in cost growth and to allow younger workers to invest part of their existing payroll taxes in personal-retirement accounts. The transition issue arises, because we will continue to make full benefit payments to today's retirees while simultaneously putting aside money for the future through the personal accounts.

Every dollar going to today's retirees is money that we have already committed to them, with or without reform. Every additional dollar flowing into personal accounts is being saved, and thus represents a potential reduction of the burden on future generations.

Suppose that you are a young parent who is concerned about the future cost of your child's college education. The only sure way to reduce the future financial burden is to save more money today. You are willing to spend less today because you know that this investment has future benefits for your child. For our nation, the choice is similar. If we wish to make our children and grandchildren better off in the future, we need to save more today. Yes, this does require that we come up with more resources today to do so, but to call this increased saving a "cost" is no more accurate than calling your decision to save for your child's education a "cost." To do so completely ignores the future benefits of the investment.

Some believe that we can ease the burden on our children and grandchildren by raising taxes today and saving that money in the Social Security trust funds. If the trust funds were an effective way to save, then increasing saving in this way would require the same transition investment as does the president's personal-account plan.

Unfortunately, though, the trust funds do not represent an effective way to save. For more than two decades, Congresses and administrations of both parties have failed to save most Social Security surpluses in an economically meaningful way, using these funds to underwrite deficits in the rest of the federal budget.

Raising taxes and then failing to actually save the money for the future would represent a true "transition cost." In contrast, personal accounts are a more effective tool for increasing saving, because every dollar flowing into the accounts is taken out of the hands of Washington politicians — making it less likely that these funds will be raided to pay for non-Social Security spending. Every dollar of this transition investment paid for with new revenue or with reduced spending elsewhere in the federal budget represents a dollar increase in national saving, and a reduction in the future costs borne by our children.

Most Americans care deeply about the future of their country and would like their children and grandchildren to have the opportunity to live at least as well as, if not better than, they. Doing nothing about Social Security is a guaranteed way to leave the children with a massive fiscal burden.

Saving and investing through personal accounts is an effective way to reduce this burden and to improve the lives of our children, our grandchildren, and all future generations. It is time that we got on with doing the right thing.


Jeffrey R. Brown is an assistant professor of finance at the University of Illinois at Urbana-Champaign, and former senior economist with the White House Council of Economic Advisers in 2001-03. Distributed by Scripps Howard News Service