I didn’t expect much when I tuned in to the “mock Social Security debate” in the U.S. Senate last evening, featuring Sen. Jim DeMint of South Carolina and three of his colleagues.  I got more than I expected – one very valuable and correct argument for establishing personal accounts in the system.

One of the worst hoaxes ever perpetrated on the American people is something Bob Dole cited as his “greatest accomplishment” when he ran for President in 1996. Dole, along with Federal Reserve Chairman Alan Greenspan, led a commission in 1983 that crafted a plan to extend the solvency of Social Security into the middle of the 21^st Century.

They did so by slowly raising the baby boomer retirement age to 67, raising payroll taxes for the 19^th time, and beginning to stuff IOUs into a file cabinet in the Bureau of the Public Debt. That file cabinet is what we know as the Social Security Trust Fund. It creates a formal debt obligation to continue to fund the Social Security system long after payroll taxes – even at the new, higher level – are sufficient to meet current benefits. 

It also helped mask the deficit that was starting to appear troublesome at the time, without actually reduce the accumulating debt.  In short, Dole, Greenspan, et al raised taxes, reduced benefits and set about to borrow record amounts of money.  They did not solve the Social Security solvency problem. They only created an intricate mask of debt to conceal the problem.  

Former Sen. Fritz Hollings of South Carolina has for years been telling anyone who will listen that the Social Security Trust Fund is “nothing but a drawer full of IOUs.”  He was exactly right of course. Where he was 180 degrees off the mark was his proposed solution. He wanted to raise taxes to solve a problem that was created by raising taxes. Congress created today’s Social Security mirage by raising the payroll tax to a height that produced a massive surplus in Social Security funds that Congress was legally obligated to borrow now and pay back later.  They did not address the question, “Where will get the money to repay the debt?”

Any corporate management team that perpetrated such a hoax on its stockholders would face serious criminal charges and class action lawsuits.

Now, back to last night’s Senate debate. Democrats have been arguing ad nauseam, and continued the same tact last night, that it is insane to think you can fix the Social Security solvency problem by “draining money from Social Security” to finance personal accounts.

This time, the Republicans (DeMint and Rick Santorum of Pennsylvania) were alert enough to knock that argument out of the park. Actually, it is the personal accounts that keep the money in the system.  Congress has been draining money from the system for years, and simply promising to pay it back without having a plan or resources to do so.  The personal accounts will be an intricate part of the new system, and the money that is now being spent elsewhere will instead stay in the system, inside the personal accounts, where Congress can’t touch it, can’t borrow it, can’t spend it for other things.

This needs to be the message the President Bush and other Social Security reformers need to drive home every day for as long as the debate continues.

One more point, just to demonstrate the level of ignorance that exists among some participants in the Social Security debate. One of the four Senators chosen by their respective leaders to engage in the mock debate last evening, Sen. Debbie Stabenow of Michigan, in her closing arguments, claimed that, according to the Congressional Budget Office, the administration of the personal accounts would cost a whopping 20% of the money funneled into the accounts. Anyone with even a cursory knowledge of money management knows that such a charge is outrageous and impossible.

Fortunately for the audience that could have been seriously misinformed, Sen. Santorum corrected her. What the CBO actually said is that the administration would cost 20 basis points – that is two-tenths of one percent.