NCPA - National Center for Policy Analysis


March 5, 2010

Because of the nature of Social Security, innovation and efficiency improvements can only play a limited role in controlling its costs, says Josh Barro, a senior fellow with the Manhattan Institute. 

With Social Security, innovation is essentially useless.  It's hard to imagine a simpler government program than Social Security, which involves taking money from some people and sending it to other people, says Barro: 

  • No amount of innovation will allow the government to send out a $1,000 check at a cost below $1,000.
  • And the Social Security Administration has little non-benefit fat to cut -- over 98 percent of Social Security's costs go to benefits, meaning opportunities for savings in overhead are severely limited.
  • The only ways to save real money on Social Security are to send out smaller checks or fewer checks. 

One innovative proposal for Social Security -- private accounts -- isn't a money saver either, says Barro: 

  • Every payroll tax dollar moved to a private account is one that the government can't use to finance current operations -- and therefore is a dollar that the government must now borrow in public markets.
  • The rise in government-issued debt would soak up exactly the amount of capital unleashed in accounts and the economic effect would be a wash. 

Of course, the government could cut other spending to avoid issuing more debt, says Barro.  Rep. Paul Ryan's Roadmap plan couples private Social Security accounts with benefit cuts and increases in the retirement age.  But it's the non-innovative components of Ryan's plan that provide real savings: the Congressional Budget Office (CBO) found that his plan would cut the deficit more if he scrapped privatization and kept his other Social Security reforms. 

Source: Josh Barro, "Innovation Isn't Enough to Fix Entitlements," Real Clear Markets, March 2, 2010. 

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