Subject: Response to the 2nd Question for Thursday
Contributor: PANELIST: Kilolo Kijakazi
Response to the 2nd Question for Thursday
Maureen asked about the option of "run[ning] up the national debt to pay for existing and near-future retirees, while younger workers are allowed to sock their money away in mandatory retirement accounts." As I noted in some of my other responses, if payroll taxes are diverted into individual accounts, the funds will have to be raised to replace these taxes so that benefits for current retirees and older workers can be paid. The amount of funds that must be raised is the transition cost and it would have to be paid by raising taxes, reducing benefits or, as Maureen suggests, increasing the national debt. There are a number of reasons why it would be unwise to increase the national debt to pay for transition costs.
The country will already be facing several fiscal problems when the baby boomers begin to retire in large numbers. Thus, we need to reduce the debt not add to it. If there were no other fiscal issues looming, then increasing the national debt somewhat might be a reasonable approach to addressing Social Security reform. However, a number of financial problems are on the horizon. When baby boomers begin to retire in large numbers after 2010 Medicare and Medicaid costs will rise substantially. The Congressional Budget Office projects that federal budget deficits will return after 2012, assuming the national debt is paid down. If the national debt is increased to pay for transition costs, deficits would return sooner. Adding to the national debt would place too great a strain on the rest of the budget and would likely result in reductions in other programs that are important to women and people of color.
If we add to the national debt, it would perpetuate itself. Increasing the debt also increases the amount of interest we have to pay on the debt. Larger interest payments speed up the point at which the deficit will return. The deficit, in turn, would make the accumulated debt still larger. This will already be a serious problem when the baby boomers retire in large numbers. Adding to the debt to pay for transition cost under a privatized program would exacerbate the problem.
What we need to do is reduce most or all of the debt, as President Clinton and some members of both parties have proposed. That way, we eliminate in a few decades the need to keep paying $200 billion every year in interest payments on the debt, thereby freeing up more room in the budget to meet the substantial Social Security and Medicare obligations we will face as a nation when the baby boomers begin to retire in large numbers and the growth of the workforce has slowed.
