Private accounts alone can't bail out Social Security
Tue Feb 24, 6:40 AM ET

After putting Social Security (news - web sites) reform on the back burner for several years, President Bush (news - web sites) is making a new push for a plan that would let workers divert part of their payroll taxes into personal savings accounts. Bush touted the proposal in his State of the Union address and again in his economic report to Congress this month.

From the way supporters describe it, the concept is simple and appealing. Workers would invest a portion of their Social Security taxes into stocks and bonds that typically yield higher returns than the current government-managed system. What's more, they say, the step is crucial in saving Social Security from insolvency as 75 million baby boomers retire during the coming years.

But much like a miracle weight-loss plan that promises stunning results without diet or exercise, the proposals to create private accounts avoid the difficult reforms required to ensure Social Security's long-term financial health: reduced benefits, higher taxes or a combination of the two.

Certainly, personal savings accounts can be part of a broader debate on reforming the national retirement system, particularly if young workers are willing to give up some traditional Social Security benefits in exchange for the opportunity to save on their own. Pretending, however, that the mere introduction of personal savings accounts will solve Social Security's problems is not only dishonest, it also misleads the public about the hard choices that will be required to put the nation's retirement program on sound financial footing.

Among the problems personal accounts don't address:

•Demographics. Social Security faces a financial crisis because the number of retirees collecting benefits in 20 years is expected to increase 60%, while the number of workers paying taxes to support those benefits is projected to increase a mere 14%. In addition, those retirees are likely to live and collect benefits longer than previous generations of retirees. Bush's own commission on Social Security reform concluded in 2001 that private accounts would not close the projected gap between taxes coming in and benefits going out.

•Costs. In the short term, personal accounts would worsen Social Security's financial condition. The reason: Some of the taxes now needed to guarantee traditional benefits to current retirees would be tapped to set up the accounts.

The Social Security Administration estimates that, depending on how the new accounts are structured, the government could have to borrow roughly $1.5 trillion during the next decade to cover the loss of taxes diverted into private accounts. That would be the equivalent of charging $8,800 to every worker's credit card.

As recently as 2001, Congress and the administration promised to reserve the government's annual budget surpluses to repair Social Security or finance the transition costs of moving to a system of personal savings accounts. Since then, they have broken their pledge by going on a spending and tax-cutting spree that has squandered $475 billion in Social Security surpluses on other purposes and has put the nation $1.1 trillion deeper into debt.