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Wednesday, December 01, 2004

Social Security Shell Game


NYU Economist Nouriel Roubini has a detailed post explaining why the Bush administration's plan to partially privatize Social Security is a "con" and a "scam." Bush wants to allow workers to put part of their Social Security taxes into a private account. Of course this would create "transition costs," since the government would need to come up with extra money to pay current retirees. Details are sketchy, but it appears that Bush plans to finance the transition costs through borrowing.

The claim is that this scheme will somehow resolve Social Security's long-term shortfall. CNN quotes an administration flack as saying "It's important to view the financing of the transition as a down payment...If we fail to act, we face a $10 trillion gap."

The problem is that this plan doesn't actually do anything. It doesn't solve the funding gap, doesn't increase national savings, and doesn't increase national income.

That's because today's borrowing to fund the transition costs has to be paid back eventually through new taxes. In other words, the private accounts are illusory: they returns they generate will just go to pay the taxes for the borrowing used to fund them. Equivalently, the Bush plan is just a new tax, one that the government returns to workers in the form of private accounts.

What Bush gives with one hand, the private accounts, he (or some future, more responsible President) takes with the other in the form of higher taxes. The "ownership society," he calls it.
 
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