U.S. Sen. Lindsey Graham (news, bio, voting record) of South Carolina said reliance on borrowing to finance an estimated $1 trillion to $2 trillion in transition costs would be irresponsible and could undermine Bush's tax- and deficit-cutting goals.

\"What I'm asking of the president, when it comes to the transition costs, be flexible,\" said Graham, who has proposed a temporary rise in payroll tax contributions to finance Social Security's shift to partial privatization.

\"I think it's irresponsible to borrow the whole trillion dollars,\" he told \"Fox News Sunday.\"

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\"What I'm asking of the president, when it comes to the transition costs, be flexible,\" said Graham, who has proposed a temporary rise in payroll tax contributions to finance Social Security's shift to partial privatization.

But nearly every leading Republican proposal on Capitol Hill acknowledges that private accounts by themselves do little to solve the system's projected shortfall of at least $3.5 trillion. Instead, those proposals rely on deep cuts in benefits to future retirees.

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That uncomfortable political truth was driven home on Monday by the head of the investigative arm of Congress.

\"The creation of private accounts for Social Security will not deal with the solvency and sustainability of the Social Security fund,\" that official, David M. Walker, comptroller general of the Government Accountability Office, said in a speech on Monday.

Or, as Thomas Saving, a Republican-appointed trustee to the Social Security trust fund put it last week: \"Fundamentally, if you don't reduce the benefits, you don't reduce the debt.\"
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Because Mr. Bush has yet to spell out any details of how he would overhaul the system, his stated principles sound like a free lunch: benefits for people at or near retirement should not go down; taxes should not go up; people who do not want private accounts should be able to keep drawing benefits.

The leading Republican proposals, at first glance, sound even better. Benefits could actually be higher than before for low-income people, widows and divorced spouses. On top of all that, Social Security's looming shortfalls, estimated variously from $3.5 trillion to $10.4 trillion, would be wiped out.

But most of the Republican proposals would also reduce the role of Social Security as a source of guaranteed retirement income, slowly but surely.

By Allan Sloan
Tuesday, December 14, 2004; Page E03

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Here are the numbers. In fiscal 2004, which ended in September, Social Security took in $155 billion more than it spent -- $69 billion in cash, which the Treasury took in return for issuing $69 billion of new Treasury IOUs, and $86 billion in interest on its trust fund, paid by the Treasury with new IOUs. Even though Social Security is theoretically \"off-budget,\" this surplus was subtracted from the deficit run up by the rest of the government. Hence we have a reported deficit of $413 billion rather than $568 billion.

Even though the Treasury ended up owing the Social Security trust fund $155 billion more than it did 12 months earlier, that obligation isn't reflected in the so-called \"unified budget,\" and no one except a few cranks like me thinks it mattered any.

And wait, it gets worse. The Treasury owes about $2 trillion to so-called \"on-budget trust funds,\" such as federal civilian and military employee retirement accounts. In fiscal 2004, it paid $68 billion of interest to these trust funds by giving them new Treasury securities. The Treasury showed a $68 billion interest expense, and the funds showed $68 billion of revenue. Net effect of the government's newly issued IOUs on the deficit: zero. The government's obligations are $68 billion more than they were, but that didn't show up in the deficit.

In any sort of reasonably honest bookkeeping system, that $223 billion -- the $155 billion to the Social Security trust fund and the $68 billion to the on-budget trust funds -- would have been reflected in the deficit figures, because those IOUs increase the government's obligations. Issuing Treasury IOUs to the trust funds is the functional equivalent of selling $223 billion of Treasury IOUs to investors and depositing cash in the trust funds. But selling bonds and making cash expenditures is considered an expense, while using bonds in lieu of cash isn't an expense. It's ludicrous.
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Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.