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.