The 40% Social Security Cut: Letting people invest retirement money in stocks may be all well and good, but it's no magic cure for our biggest social program.(National Affairs)(Brief Article)

If you listened to the noises emanating from the White House, you would think that letting workers put part of their Social Security taxes into individual stock-market accounts will painlessly solve Social Security's problems. "Individually controlled, voluntary personal retirement accounts... will augment the Social Security safety net," President George W. Bush wrote in the executive order setting up the President's Commission to Strengthen Social Security. Sounds real good, doesn't it? But what Bush isn't saying is that the safety net is going to develop a lot of holes. And Bush also isn't saying that, regardless of how well individual accounts might perform, future beneficiaries are going to wind up with substantially lower Social Security benefits than are called for under current law. Here's why. Social Security is facing long-term problems that will start in about 15 years, when baby boomers will be retiring en masse. If you want to divert money into private accounts and also fix Social Security's long-term problems, you need to cut future benefits about 40 percent from the current formula. That's right, 40 percent. And unless you happen to have the Warren Buffett touch, your private account won't come close to making up for that cut.

In fact, the Social Security commission is likely to bring up those huge future shortfalls at its next meeting, on July 24. But Washington being spin-doctor heaven, you can bet that the uncertain--and speculative--gains from private accounts will get a lot more attention than the certain pain from benefit cuts. As we saw during the tax-cut debate, which was full of numbers that were utterly bogus, Bush is all in favor of "fuzzy math" if it's his folks who are doing the fuzzing.

A 40 percent future cut may strike you as alarmist fantasy, but it's not. Here's the math. Bush's campaign proposal was to divert 2 percent of Social Security wages into optional private accounts. That money wouldn't be available to pay benefits. Now, open the 2001 Social Security trustees' report. Go to the intermediate estimates on page 44. Subtract Bush's proposed 2 percent diversion from Social Security's revenues. The program starts running a cash deficit in 2007, nine years earlier than now envisioned. By 2015, the deficit is 16 percent of projected benefits. By 2035, 37 percent. And forget the Social Security "trust fund." It's useless, for ...