Editorial: Sabo answers Bush’s challenge

02/22/2005

February 22, 2005, Star Tribune

As he barnstormed the country for a new system of private retirement accounts last week, President Bush threw down a challenge to Congress: Shore up the finances of Social Security while producing a better return for younger workers.

On Monday Rep. Martin Sabo took up that challenge. The Minnesota Democrat introduced legislation that would restore Social Security to long-term solvency, increase its internal rate of return and preserve the venerable program as a safety net for elderly Americans. Sabo’s plan isn’t perfect, but it is simpler, safer and more honest than anything the White House is selling.

First a little background. Social Security faces solvency problems over the long run, but at the moment it produces large annual surpluses because it collects more in payroll taxes than it pays out in benefits. It invests the surpluses in a special class of Treasury bonds, which are deposited in the Social Security trust fund.

Sabo’s bill would require the Treasury Department to pay a higher interest rate on those bonds, a rate that is closer to market rates of return and one that falls in the midrange of what Treasury bonds have paid during the two decades. (For those who like numbers, Sabo would require the Treasury to pay Social Security 4.7 percent above the rate of inflation, instead of the 3.3 percent in current forecasts. The Treasury paid Social Security 4.1 percent above inflation for most of the 1990s and 6.3 percent for most of the 1980s.)

The Congressional Budget Office estimates that Sabo’s bill would give Social Security enough funds to pay full benefits over its 75-year actuarial horizon. In other words, with what is effectively a one-sentence piece of legislation, Sabo would solve the “crisis” that Bush repeatedly invokes while preserving Social Security as the foundation of retirement security.

Of course there’s a catch to Sabo’s plan: It would increase outlays by the Treasury Department at a time when the government already faces very large budget deficits. That’s the second financing dilemma for Social Security, and it’s a serious one because some future generation of taxpayers will be responsible for those obligations. But the president’s privatization plan does exactly the same thing. The White House acknowledged this month that it would borrow at least $700 billion over the next decade to finance the transition to private accounts, a sum that is almost certainly bigger than the obligations entailed by Sabo’s plan. And, the White House acknowledged, all that borrowing for private accounts still wouldn’t close the solvency gap inside Social Security.

We think any plan for Social Security should include modest benefit cuts as well as additional revenues, or else retirement costs will consume an ever-growing share of the federal budget by the middle of this century. The value of Sabo’s proposal is to demonstrate that there are simple, practical steps to fix Social Security for the long run without taking a costly leap into private accounts, and without jeopardizing the safety net of America’s retirees.