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Kellogg Co. (K
) CEO Carlos M. Gutierrez is joining President Bush's new economic team as Secretary of Commerce. He will help sell Congress and the American public on the idea of partially privatizing Social Security. We hope that Gutierrez insists that the high standards of financial honesty and transparency that marked his years at Kellogg be applied in the public realm. The recent proposal to take the $1 trillion to $2 trillion 10-year cost of reforming Social Security "off-budget" and not include it in the federal budget deficit is as irresponsible as it is dangerous. An Administration that in its first term fought against the hidden government backing of Fannie Mae (FNM
) mortgage securities should not in its second hide the true borrowing cost of adding private accounts to Social Security.
The idea of Social Security private accounts is hugely popular among the young who want to control more of their own retirement financing. The problem is that diverting two to four percentage points of employees' 6.2% payroll taxes to privately owned accounts deepens Social Security's financial hole. The system must still cover its obligations to current retirees and soon-to-retire baby boomers with less revenue flowing in.
The President's advisers are telling him to just borrow the trillion or two to cover the cost of transition to private accounts. A number advise him to go further and not include the huge new debt in calculating the nation's annual budget deficit. They suggest that the cost of the private account be treated as a prepaid benefit for future retirees, not as a present-day expense. They also say that borrowing for a decade or two to reform Social Security will make it solvent 30 to 40 years down the road. Therefore, the cost of transition should be considered outside normal 10-year budget calculations and should be placed off-budget.
We say a banana is a banana and debt is debt no matter how you stretch to define it. As scandal after accounting scandal in Corporate America has shown, flim-flamming balance sheets through gimmicks such as Special Purpose Entities can lead to disaster. Nervous bond markets, rising interest rates, and a weaker dollar abroad may already be signaling concern about talk of hiding trillions in new government borrowing. If we are going to change Social Security, let's talk about the real issues -- trimming benefits, raising the retirement age, and, above all, calculating the cost -- openly and honestly.