Would Borrowing $2 Trillion for Individual Accounts Eliminate $10 Trillion in Social Security Liabilities?

Publication Date: December 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Peter R. Orszag; William G. Gale; Jason Furman

Research Area: Banking and finance

Keywords: Economic projections; Fiscal future; Retirement; Senior citizen

Type: Report

Abstract:

Administration officials have been downplaying the significance of the $2 trillion in transition costs required by some individual accounts plans, by comparing that cost to the unfunded liability in Social Security over an infinite time horizon, which totals more than $10 trillion. For example, White House Press Secretary Scott McClellan responded recently to a question about how the White House would pay for the $2 trillion transition cost by arguing “It’s a savings, because the cost is $10 trillion of doing nothing, and this will actually be a savings from that cost of doing nothing.”
This argument is misleading. The $10 trillion number is taken out of context; it refers to the Social Security shortfall not over 75 years, but into eternity. Social Security does face a long-term deficit, but it is relatively modest as a share of the economy; in fact, it is considerably smaller than the cost of the tax cuts passed in 2001 and 2003, if those tax cuts are made permanent. More fundamentally, borrowing $2 trillion to fund individual accounts does nothing to reduce Social Security’s long-term deficit. Individual account plans that eliminate the long-term deficit in Social Security, such as the principal plan the President’s Social Security commission proposed, do so entirely by reducing future Social Security benefits, not because of borrowing.