Enron Lives

Saturday, April 30, 2005
this is an image
this is an image

Talk about shooting the messenger: Critics are slamming President Bush’s drive to reform Social Security for its supposedly astronomical transition costs. But those costs don’t arise from Bush’s solution. They show up on the books simply because Bush wants to undo the Enron-style techniques that the government has used on Social Security. Such honest accounting is the first step in ensuring that Social Security doesn’t wind up like Enron.

It all goes back to 1968. In a bid to make the budget seem balanced in an election year, President Lyndon Johnson lumped the Social Security Trust Fund and other government trust funds into a single “unified” federal budget. The long-term effect was to move trillions in debt off the government’s books. The government had been using, and still uses, its more than 100 trust funds as private banks. It sold its bonds to them, but once under the unified budget, officials never talked about those debt instruments when they talked about “federal debt.” (“We owe the money to ourselves” ran the explanation.)

Today these phantom bonds total about $3.2 trillion, or 42 percent of the government’s total outstanding debentures.

Hiding debt in a subsidiary was exactly the ploy that Enron executives used to cover the mounting obligations of their failing firm. And, like Enron, the U.S. Treasury was as much on the hook for its invisible bonds as for what it called “debt in public hands.” After all, its payments were to be used to meet such very real obligations of the trust funds as fulfilling Social Security’s promises to Americans in their old age.

And yet, for more than four decades, “debt in public hands” has been accepted as the federal government’s total debt. And that gimmick is behind the charge that going to personal Social Security accounts would run up $2 trillion in transition costs.

Obviously, personal account dollars invested in the economy as a whole will not be available for lending to the government. Obviously, the U.S. Treasury will then have to sell more of its bonds on the open market. But, obviously, the government will be borrowing exactly as much with personal accounts as it would have without personal accounts.

The government isn’t running up new debt. It’s just admitting the truth. So moving to personal accounts will cost the government no more than not moving to them. In fact, it can save trillions instead. How? The flip side of the government using the Social Security Trust Fund as a private bank is that our money in the fund is anything but diversified. (This is also like Enron, which long tied up employees’ company-controlled 401k contributions entirely in the corporation’s own stock.) Personal accounts will let us broaden our Social Security portfolios from just one financial vehicle into many. The reform also opens us to earning the higher returns that have invariably gone with investing in the entire economy.

Recent studies have looked at the returns from broadly diversified portfolios when contributions were spread over the span of a working life, as personal account contributions would be. (No one’s talking about shifting people who are near retirement to the new system.) Going back well over a century (even in periods that include the Great Depression), personal accounts would have returned far more on the dollar than Social Security will for today’s young people. And if young people can put enough Social Security dollars into personal accounts (roughly half of the total employee-employer contribution), the higher returns could close the gap between the system’s promise and what it can deliver by the time they retire and then some. The system’s total unfunded liability could disappear, leaving today’s young people with even more for their retirements.

The first step toward solving the problem is admitting that we have it—which means undoing the deception (one of the many) left to us by Lyndon Johnson. Fixing Social Security starts with looking honestly at what the government really owes and to whom it owes it.