Discussing proposals to change Social Security, former Speaker of the House and Fox News contributor Newt Gingrich insisted that "there's a way to write a plan that gets you to total solvency" solely by allowing workers to divert payroll taxes into private investment accounts, without cuts in guaranteed benefits. In fact, the plan Gingrich favors restores "solvency" to the program only by assuming a transfer of $7 trillion in general revenues into Social Security over 75 years, according to the Social Security Administration. But the plan offers no specific mechanism to fund this massive transfer. Instead, the proposal makes two dubious assumptions about how the government will come up with the money: first, that the U.S. Treasury will enjoy a surge in corporate tax revenues from an increase in economic growth, which the plan's supporters project will result from increased investment in the stock market; and second, that Congress will free up additional funds for Social Security by enacting massive cuts in general spending.
On the March 10 edition of Fox News' Hannity & Colmes, co-host Alan Colmes asked Gingrich to support his suggestion that President Bush should focus solely on private accounts and not attempt to address solvency through tax increases or cuts in guaranteed benefits. Colmes noted that even the Bush administration has admitted that private accounts do nothing to address Social Security's long-term solvency:
COLMES: We have to deal with the solvency issue. The private accounts, it's already been acknowledged by the administration, doesn't deal with the solvency issue. So if all we're going to talk about is private accounts, we're not really solving the problem. Don't we have to do something to solve the issue of whether we can pay out these moneys?
GINGRICH: I do think, as I said, there's a way to write a plan that gets you to total solvency within less than a generation, actually starts to pay down the FICA tax, because you end up with too much money. But I think that that requires focusing narrowly on one issue: should we allow younger Americans to have a personal Social Security savings account?
The Washington Post reported on February 23 that Gingrich was among the strongest supporters of the so-called "free lunch" plan, proposed by Sen. John E. Sununu (R-NH) and Rep. Paul Ryan (R-WI) (S. 2782 and H.R. 4851), which purports to address the system's long-term solvency solely through private accounts. The original author of the plan is Peter Ferrara, a former Reagan administration official who is a senior policy adviser at the Institute for Policy Innovation. The Post explained how Ferrara's plan purports to address solvency:
Like the Bush proposal, Ferrara would offset contributions to voluntary private accounts with equal cuts to workers' base Social Security benefit -- what workers see as a monthly, guaranteed check. But under Ferrara's plan, the accounts would be so big that participating workers beginning their careers this year could expect to have no basic Social Security benefit left by retirement, according to a Social Security actuarial analysis.
On the plus side, Ferrara says, the accounts would grow so quickly that they would more than make up for the lost benefit, disputing a contention shared by the White House that personal accounts alone cannot solve Social Security's problems [with solvency].
Because the Sununu-Ryan plan would let workers invest 6.4 percentage points of payroll taxes -- as opposed to the 4 percentage points that Bush is expected to propose -- the so-called "transition costs" of such a plan would be even higher. Transition costs arise for all proposals that use payroll taxes to finance private accounts because under the current pay-as-you-go system, payroll taxes collected from today's workers are primarily devoted to paying benefits to today's retirees. But if a substantial portion of these taxes are diverted to fund private accounts, new money is required to pay current benefits.
Social Security Administration chief actuary Stephen C. Goss estimated that the Sununu-Ryan plan would require more than $7 trillion in transfers from the General Fund to the Social Security trust fund between 2003 and 2078 (sum of column (7) on table 1d). But in order to fund these massive transfers, the plan relies on highly dubious assumptions about increased economic growth and the will of future Congresses to enact massive spending cuts over the next several decades.
Goss explained in his summary of the plan:
The plan would provide direction to the Congress and the President that the growth rate in total actual Federal Government spending should be diminished as specified above for the computation of transfers. Specified transfers to the Trust Funds would, however, not be contingent on achieving these reductions in actual Federal spending.
Indeed, Section 4 of the proposal simply instructs the Secretary of the Treasury to "estimate and transfer to the Federal Old-Age and Survivors [Disability] Insurance Trust Fund [OASDI] ... an amount equal to the recapture amount for such fiscal year." The "recapture amount" refers to a formula specified in the bill that purports to calculate the additional tax revenue that the Treasury will collect as a result of increased investment and economic growth spurred by the investment of payroll taxes in the stock market. Next, Section 4 mandates additional transfers each fiscal year in an "amount equal to the spending reductions amount for such fiscal year." But the bill would have no power to force future Congresses to enact such cuts. Rather, it simply instructs the Treasury to transfer an amount equal to what its sponsors assume (or hope) Congress will enact. Finally, the bill mandates additional transfers from general revenue "in any case in which the OASDI trust fund ratio is less than 125 percent," that is, in case the previous two types of transfers are insufficient to maintain a positive cash flow to and from the Social Security trust fund.
The Center on Budget and Policy Priorities concluded that the plan is "predicated on a massive magic asterisk":
The Ryan-Sununu plan ostensibly finances its massive transfers in large part by assuming that government spending can be reduced (relative to what it would be with no policy changes), but it provides no credible mechanism for achieving the necessary reductions. The plan should thus be viewed as predicated on a massive magic asterisk, in which trillions of dollars are simply assumed to be forthcoming from the rest of the budget.