Schieffer was wrong, Kerry was right

Contrary to the moderator's suggestion in the third debate, Social Security is not running out of money. And the Democratic candidate wasn't pandering when he said privatizing it would be disastrous.

Published October 14, 2004 3:30PM (EDT)

CBS New anchor Bob Schieffer did a fine job of moderating the third presidential debate. Except for one thing. And that was when he began his question on Social Security by stating, "We all know Social Security is running out of money."

Social Security is not running out of money. Here are the facts.

1. Social Security is part of the government. It cannot run out of money unless the whole government also runs out of money. And the government of the United States cannot run out of money. That is not my opinion, it's an economic fact.

2. Social Security is an entitlement. Not even Congress can easily interfere with its payments. Congress would have to vote to default on the bonds Social Security holds for benefits to fail over the next 40 years. It would have made more sense for Schieffer to say, "We all know that the Pentagon is running out of money" -- military spending must be appropriated each year. But we all know that the Pentagon won't be permitted to run out of money. Ditto Social Security, in spades.

3. Yes, the U.S. government can make policy mistakes. It could potentially run such large deficits that we would get a ruinous inflation, or a disastrous decline of the dollar. But such a result could never be due to Social Security alone. It's a risk of the budget deficit as a whole. Obviously, Bush's tax cuts made a much larger contribution to the overall deficit than Social Security ever will.

4. Right now, Social Security isn't running a deficit. It's running a surplus. Yes, that's right. The payroll tax takes in more revenue than Social Security pays out. This will continue to be true until at least 2018. It could remain true for much longer than that -- if the economy starts to grow good payroll jobs, on which Social Security taxes are paid.

5. After 2018, because of the retirement of the baby boomers, it's likely that Social Security benefits will exceed payroll tax revenues. Is this a problem? Not really. The program's trustees project that benefits can be paid with no changes at all in the program until 2042. The Congressional Budget Office says 2052. If the economy does as well between now and then as it did during the past 75 years, no changes will ever be needed. And if it doesn't, the real benefit when shortfalls hit will still be higher than today.

6. If the Trust Funds eventually have to be adjusted in order for full promised benefits to be paid, minor adjustments will suffice. And they will be good policy. When payrolls are relatively small, why not tap other revenues to pay pensions? The tax increases in any decade from the '50s to the '80s would have been adequate to plug the gap. Suppose, for example, that the estate tax were not repealed but instead credited to Social Security? In that way, much of the shortfall could be covered from America's most progressive revenue source. (Even the New York Times' editorial board recently suggested this might be a good idea.)

7. How long can we go on paying Social Security benefits at present and projected levels? Essentially forever. Social Security benefits are not grossly excessive. And at 6.6 percent of gross domestic product over the long run, they won't become grossly excessive. Unlike medical costs, per capita retirement costs are not exploding. As economist Dean Baker puts it: "There was no point in the years from 1937 until the 1983 reforms when the program would have looked as strong as it does today."

8. When NBC's Andrea Mitchell accused John Kerry of pandering on Social Security after the debate, she reflected the mind-set of the coddled rich. Yes, it may be necessary someday to touch a little more of her income to cover all the bills. But frankly, Mrs. Greenspan, it's worth it -- both to protect America's elderly and to watch you squirm.

9. After that lousy preface, Schieffer asked a good question. Privatization of Social Security would divert payroll tax revenues into private accounts. And that would blow a huge hole in the budget. Bush simply ignored this fact, as he always does. The fact is, Bush wants to gut Social Security. He made that clear Wednesday night.

Kerry's answer on Social Security wasn't pandering. He said that we can keep the system we have. He said we must not privatize it -- "an invitation to disaster." He said our priority should be to create jobs, the best way to pay for the system. And he said that we can well afford to wait until later to see if some minor changes would be wise. Kerry was right on all of these facts.

By James K. Galbraith

James K. Galbraith organized a conference on the “Crisis in the Eurozone” at the University of Texas at Austin on November 3-4. Papers and presentations can be found at, along with a video archive of the full meeting.

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2004 Elections Alan Greenspan Federal Deficit Social Security