Wednesday, July 27, 2005
All of the major proposals to replace a portion of Social Security with private accounts would require large increases in federal borrowing for many decades. This increased borrowing is not necessary to restore Social Security solvency. Instead, the increased borrowing would be needed to finance the creation of the private accounts, which by themselves would not do anything to restore solvency, and under some circumstances would worsen solvency. Some plans with private accounts, like the President’s, would shrink the solvency gap by reducing Social Security benefits (over and above the benefit reductions that are designed to compensate for the loss of payroll taxes diverted to private accounts). These benefit reductions would partially offset the increased borrowing that would result from the private accounts. Even when these benefit reductions are taken into account, however, all of the proposed plans that include private accounts would substantially increase the federal debt and the interest payments on the debt.