July 31st, 2007

How many times do we have to say it?

Posted in  Entitlement Reform 
Author: Lawrence A. Hunter || Location: Washington, DC, USA

Washington Post columnist Robert Samuelson claims that the problem of what to do about the looming entitlement crisis has been ignored because, “Washington’s vaunted think tanks—citadels for public intellectuals both liberal and conservative—have tiptoed around the problem”...failing to…“expand the public conversation by saying things too controversial for politicians to say on their own.  Here, they've abdicated that role.”

To the contrary, IPI has been on the cutting edge of saying things about entitlement reform that not only politicians but also most Washington think tanks are afraid to say.  Mr. Samuelson seems to have missed IPI’s web site (www.ipi.org) where he would find a burgeoning library of reports on what to do about Social Security and Medicare that refute the conventional wisdom that has policy makers wringing their hands, trapped in a false dilemma of their own making.  Indeed, it was IPI that developed the plan on which Congressman Paul Ryan (R-WS) and Senator John Sununu (R-NH) based their plan to reform Social Security with personal retirement accounts.

But more important than the details of any particular reform plan, IPI has offered a solution to financing comprehensive reform in a practical step-by-step manner based on a financial approach similar to a standard corporate workout, which one sees in private-sector bankruptcy proceedings everyday.  The essence of the plan is a financial and operational reorganization that borrows funds to replace the currently unsustainable tax-and-transfer government-benefits program with a market-based investment program financed by refinancing outstanding government debt obligations with new debt backed up not only by the full faith and credit of the United States government but also by the productive power of the U.S. economy.

Americans have a well deserved skepticism of public debt.  As Milton Friedman observed:  “History suggests that Washington spends whatever it receives in taxes plus as much more as it can get away with.  Deficits have been the norm.”  (“What Every American Wants,” Wall Street Journal Opinion Journal, Sunday, January 19, 2003.)  Government borrowing, as a rule, is undesirable because it simply increases the amount of resources the government can extract from the private sector over and above what it can tax; it usually facilitates overspending.

However, there are very important instances in which public borrowing can help reduce the size of government and lead to overall improvements in economic efficiency.  Friedman himself recognized these opportunities when he put forward a simple plan for solving the looming Social Security crisis.

Friedman outlined his plan in Free to Choose and earlier writings.  His proposal was to simultaneously repeal payroll taxes, keep the government’s pledge to pay all Social Security benefits promised under current law, and buy out younger workers by swapping their entitlement to future retirement benefits for an annuity of equal value or an equivalent amount of government bonds.  Workers would then be able to fund their own retirement.  Friedman proposed financing the reform by issuing new federal debt.
 
“This transition,” Friedman wrote, “does not add in any way to the true debt of the U.S. government.  On the contrary, it reduces that debt by ending promises to future beneficiaries.  It simply brings into the open obligations that are now hidden. It funds what is now unfunded.”

The personal-accounts plan that IPI developed was essentially a version of Friedman’s proposal.  In numerous newspaper op-eds and reports, I explained why borrowing the money to pay so-called “transition costs” to personal retirement accounts does not comprise new borrowing and is the only economically rational way to reform Social Security.
 
Contrary to the conventional wisdom about so-called “transition costs”—a conventional wisdom perpetuated by Washington think tanks on both the right and the left who are obsessed with cutting future Social Security benefits, increasing taxes and raising the retirement age—the transition to fully funded personal retirement accounts is similar to a corporate workout.  No new debt is required.  Existing debt is simply refinanced to provide time and free up cash to restructure the operation, making it more efficient and productive in the future so that it is capable of providing better retirement benefits while repaying all the debt.

How many times do we have to say it?