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Larry Hunter is on the op-ed page of the Washington Times this morning, pushing the conspiracy fairy tale that the Bush administration is desperately seeking a Social Security tax hike as part of a reform compromise with Democrats. It's the same fantasy that Peter Ferrara and Tom Giovanetti have been spinning. Aside from the entirely fictional claims that "Advanced maneuvering for the coming White House sellout on Social Security is well under way," Hunter is an advocate of Ferrara's fiction-based solution -- a Rube Goldberg contraption that pretends to preserve benefits, not raise taxes, and add private accounts (why not make your teeth whiter and cure your dandruff, too?). Hunter correctly says,

By actuarial standards applicable to any private pension fund, the Social-Security Ponzi scheme already is insolvent, papered over by IOUs Congress has written to itself. Social Security's near-term cash-flow situation, however, is quite good, scheduled to remain in surplus until 2017; until 2027 if the annual interest due the Trust Fund is taken into account, as it should be. Therefore, higher tax revenues today that enlarged and extended the surpluses would not improve the program's solvency; they would only paper it over with more IOUs and magnify the size of the theft Congress perpetrates on the Trust Fund each year. If Congress wants to do something serious about Social Security's solvency, it should stop the raid on Social Security, not expand it.

But here's what he doesn't tell you. The Ferrara plan, which Ferrara will endlessly tell anyone who will listen (and those who won't) has been "scored" by the Social Security Actuary as restoring the system's "solvency" (a concept which, by the way, Hunter mocks in this op-ed when administration people cite it). Yet this actuarial analysis depends critically on the false assumption -- which Hunter admits is false -- that the Trust Fund represents actual assets that the system can draw upon. What's worse, it depends on dedicating $7.9 trillion in new corporate tax revenues to Social Security, and requires making $6.8 trillion in unspecified spending cuts in the federal budget. No new taxes? Hardly. No benefit cuts? Hardly. IOU's congress has written to itself? Suddenly no problem.

Update... an anonymous reader sends in this penetrating commentary:

Concerning Larry Hunter’s Washington Times piece this morning, I’m all for saving the surplus but it’s really just a tiny part of the whole problem. The present value of Social Security’s total shortfall is something like $13.4 trillion. The present value of payroll tax surpluses from 2007 through 2017 is about $600 billion (the interest part through 2027 is silly). So that means that even if we truly save every penny of that amount (which means cutting the spending currently financed by payroll tax surpluses, rather than just issuing new government debt) we’ve addressed less than 5 percent of the total problem. And the longer we go without addressing the big stuff the more likely it’ll be done on the tax rather than the benefit side, given the changing ratio of collectors to payers. So while I agree with saving the surplus, Larry’s approach is likely to lead to more tax increases, not less.

Concerning Peter Ferrara's plan, he certainly shows clearly why the President’s drive to reform Social Security in 2005 faced so many difficulties; any talk of tax increases or benefit reductions is bound to be politically difficult. But simply because Peter he has his own alternative reform plan doesn’t mean that his plan would actually have worked. In fact, it is highly unlikely a proposal like Peter’s could ever become law.

Economists have a saying that $20 bills don’t lie on the sidewalk for very long. In other words, if something looks too good to be true then it probably is. Congressional and White House staff are well aware of the details of Peter’s approach. And as people who actually deal with angry constituents and political attack ads, you’d think they would be the first to embrace a plan that contains no tax increases, no benefit cuts, no risk and no pain. The fact that they haven’t should indicate there’s more going on than Peter always talks about.

Here’s a quick outline of Peter’s proposal:

• Workers get to invest around half of their payroll taxes in a personal account;
• At retirement, they’re guaranteed the larger of their current law benefit or what their account could pay;
• Transition costs are funded with transfers of general tax revenues;
• General revenues would be freed up by reducing the growth of federal spending and assuming increased corporate tax revenues through higher economic growth.

More details are available through the SSA actuaries’ analysis of Peter’s plan.

I note a couple of issues:

First, over 75 years, Peter’s plan would cost several trillion dollars more than it would cost to fund current law Social Security, even under favorable assumptions. While it would pay higher benefits, if the rising cost of funding Social Security is the problem it is very hard to sell Peter’s proposal as a solution. (Hint: The solution should cost less than the problem.) If we have enough money to pay for Peter’s plan, we have more than enough for current law. ‘Nuff said.

Moreover, without these general revenue transfers, Peter’s plan would increase the Social Security deficit by almost 50% (see the “Change in actuarial balance”). So much for the idea that the accounts restore the system to solvency; in fact, it’s simply infusions of additional tax revenues that do it.

Second, Peter’s plan to pay transition costs by cutting other government programs is highly unlikely to succeed. Total government spending generally over time has remained at around 18-20 percent of GDP. Peter’s plan to fund transition costs would reduce government spending by around 1.5% of GDP, with the proceeds going to Social Security. This doesn’t sound like much, but it amounts to roughly 10 percent of all non-Social Security spending; or around one quarter of all spending other than Social Security, defense, interest, Medicare and Medicaid; or almost one-half of non-defense discretionary spending. Leaving aside the merits of cuts of this size, nobody should be fooled that they would be easy or uncontroversial. Moreover, under Peter’s plan the general revenue transfers to Social Security would take place even if Congress failed to cut a penny of other spending programs. Given Congress’s reluctance to make even small spending reductions, the most logical conclusion is that Congress would simply borrow the money. That simply wouldn’t sell.

Peter’s latest idea involves generating savings by block-granting spending programs to the states. But it’s not the block grant that’s generating actual savings, it’s the cuts. To generate any revenue the grants obviously have to be far smaller than what otherwise would have been spent. While block grants may or may not be a good idea, Peter is kidding himself if he thinks this won’t be controversial. And constructing a reform plan that’s not controversial and could easily pass is ostensibly what he is working on.

Third, most economists and financial experts believe that the true cost of the benefit guarantee in Peter’s plan is significantly higher than shown in the SSA actuaries’ memo. The reason is that, unlike private financial markets, the actuaries do not count the cost of market risk in making their estimates. If the guarantee were provided by private financial markets, which presumably are as efficient as government and have every interest in pricing it accurately, it would cost 2-3 times more than the $2 trillion or so estimated by the actuaries. In addition, if Peter’s plan succeeded in raising economic growth the guarantee would get even more expensive. Why? Because the growth would come through higher saving, which would increase wage growth and reduce interest rates. Since current law benefits are based on wage growth and the account returns depend on interest rates, this means the target he accounts would have to reach would be higher but their ability to reach it lower. Result: higher costs.

Fourth, the recapture of increased corporate tax revenues that Peter would use to fund a significant part of his transition costs would occur only if accounts were funded with spending cuts (which, as shown above, is implausible). Moreover, the estimates of increased corporate tax revenues seem optimistic; by 2075 the assumed increase in corporate tax revenues would equal almost 3 percent of GDP despite the fact that total corporate tax revenues today are less than half that amount. A tripling in total corporate tax revenues implies a tripling of the corporate sector of the economy; this is simply implausible under any standard economic growth model.

Finally, while Peter attacks other plans for having “benefit cuts,” in his own plan the traditional Social Security benefit is cut to zero (see column 4, titled “OASI benefit cut for IA participation”). Full career workers would derive their entire benefit from the personal account. To compare his plan to other personal account plans he would have to include the other plans’ benefits provided by personal accounts, which he usually doesn’t.

In sum, Peter’s approach avoids the tough choices of increased taxes, reduced benefits or market risk only through a number of heroic assumptions, the implausibility of which are clear to most analysts who examine his plan. In the real world of politics and policy, these difficult choices can’t be avoided. Some difficult choices are better than others and so coming to agreement on reform isn’t easy. But it certainly isn’t made easier by people who claim there are no difficult choices at all.

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