Don't Exempt Social Security From The Bba

Volume II, Number 14 November 25, 1996

It looks like the Balanced Budget Amendment (or BBA) will come up for another vote this spring. If all of us were angels, we might not need it. But in the real world, the BBA could constitute a vastly positive rule change that would assist in balancing th e budget, raising national savings, and restoring faith in government.

Unfortunately, if the debate goes anything like it did last time, many voices will urge exempting the Social Security trust funds. This exemption has three kinds of supporters: Those who favor it to spike the amendment, those who favor it to ensure that t he amendment, if passed, won't have any force, and -- perhaps the smallest group -- those who actually think it's a good idea.

It's a terrible idea. Before the debate over the BBA begins again in earnest, it's worth reviewing and exposing the myths propagated in behalf of the exemption.

Myth 1: Keeping Social Security off the budget table would mean fewer painful spending cuts.

Wrong. Because the amount that would be exempted from the BBA's deficit calculations -- Social Security's annual trust-fund balance, including interest -- is expected to be positive for the next twenty-two years, Congress would have to save more from a sm aller share of the budget. In FY 2002, the earliest year the BBA might take effect, CBO projects that the unified budget deficit will be $212 billion and that the Social Security surplus will be $104 billion. Thus, Congress would have to cut spending or r aise taxes that year by $316 billion (with the exemption) rather than $212 billion (without it). In other words, the exemption would increase the BBA's required savings by one-half -- even as it reduces the means of achieving that savings by placing one-q uarter of all federal noninterest outlays out of bounds.

There are two ironies here. One is that those legislators who have pushed hardest for the exemption are the very ones who fret loudest over the BBA's "catastrophic" fiscal impact. The other is that some fiscal hawks support the exemption precisely because it does increase the pain. It's time, they say, that we really save the Social Security surplus by running a unified budget surplus of equal size. This argument, ho wever well intentioned, overlooks the fact that the Social Security surplus is an arbitrary legislative artifact. There is nothing in the design of Social Security, with or without the BBA, that would prevent Congress from changing that surplus into a def icit tomorrow. And in any event, the current Social Security surplus will soon recede and disappear. Seeking and attaining a substantial unified budget surplus may be a laudable goal for our time. But the timeless Constitution is not the means to attain i t.

Myth 2: The exemption would protect today's seniors.

Wrong again. By the time Congress has achieved the first $212 billion of its savings target, defense and domestic discretionary programs will surely have been picked clean. To find an extra $104 billion in savings, Congress will have few choices but to ma ke still larger cuts in Medicare and Medicaid than those it is already considering. Since roughly three-quarters of combined outlays under these programs go to Americans aged sixty-five and over, an across-the-board whack of $104 billion would reduce seni or benefits by an extra $78 billion. Without the exemption, these cuts wouldn't be needed. Yes, Social Security might be trimmed -- but few have proposed near-term savings of this magnitude.

Myth 3: The exemption would not affect the goal of budget balance.

To the contrary, it would turn the BBA into a deficit sieve. Because there would be no rule to prevent the Social Security trust funds from running a deficit, Congress could engage in deficit spending anytime by the simple expedient of redefining what we call "Social Security." It could do so by taking earmarked revenues out of the trust funds or by relabeling other federal outlays and shifting them into the trust funds. In a world in which the White House proposes to keep Medicare "solvent" by shuffling outlays between its trust funds, such shenanigans hardly seem farfetched. This is a loophole through which a Niagara of red ink could pour. And all it would require is a majority vote of Congress.

Moreover, even if Congress resists playing fast and loose with the trust funds, the exemption will eventually blow a gaping hole in the BBA anyway. The problem is that the annual Social Security surplus is projected to peak around 2010 and thereafter head steeply downhill. By 2019 -- as Boomers retire en masse -- the trust-fund balance will turn negative. By 2025, Social Security will be running an annual deficit of $315 billion. By 2029, the year the trust funds are projected to go bankrupt, that deficit will reach $642 billion. This is the sum Treasury would be able to borrow from the public that year and still remain true to the BBA-with-exemption.

After 2029, Treasury borrowing from the public could keep growing without limit -- to $2.1 trillion a year by 2040 and $5.1 trillion by 2050. True, Congress would have to change the law to allow the Social Security trust funds to become a net debtor. But why not? There would be no constitutional prohibition. The trust funds could simply begin sending IOUs to Treasury rather than the other way around, as is now the case.

Myth 4: The exemption is justifiable because the Social Security trust funds are "self-financing."

The problem is that these trust funds are not self-financing. Yes, it's true that under current law annual benefits paid out can never exceed earmarked tax revenues plus accumulated trust-fund "assets." But, as noted above, this law can be changed at any time. Moreover, even without a change in law, the trust funds are able --through acts of lending or borrowing that are unconstrained by the normal budget process -- to diverge widely from the standard of strict deficit neutrality. And, to the extent they do, they can wreak havoc with the net dollar amount Treasury borrows from the public.

There is a further problem with Social Security's alleged self-sufficiency. Unlike trust funds that trade current contributions for current benefits (for example, Unemployment Compensation), Social Security trades contributions for benefits across entire lifetimes. This lag makes Social Security's current (cash) balance utterly misleading as a measure of its true (accrual) balance. While it may be true that Social Security now enjoys an annual cash surplus of roughly $65 billion and possesses Treasury ass ets of $550 billion, it is also true that it now suffers an annual accrual deficit of $650 billion and has a total unfunded liability of $8 trillion.

This liability is a measure of the net gift that today's adults expect to receive from future generations. Its economic significance does not show up in direct Treasury borrowing, but in lower private-sector savings rates.

Myth 5: Not touching senior benefits is at least a laudable goal.

What can you say about a goal that's laudable but impossible? The facts explain themselves. From now to 2030, total spending on Social Security, Medicare, and Medicaid will, according to the CBO, rise by 10 percent of GDP. Already by 2020 --assuming we do n't raise taxes -- we could zero out all other federal spending except interest on the debt and still not balance the budget.

We wouldn't, that is, unless we undertake structural reforms of the programs in question. These reforms won't be easy. But, if we start now, they can be gradual and need not require painful sacrifice from seniors who are already retired or in genuine fina ncial need. Sooner or later, reform will come anyway. By blinding us to the full magnitude of the challenge, the Social Security exemption will merely make timely reform impossible.

Unlike most constitutional amendments bandied about today, the BBA has a long and venerable tradition. From America's very founding, great statesmen have argued that the right of a democratic government to borrow must be bounded by constitutional safeguar ds. The issue, as Jefferson put it, is "whether one generation of men has a right to bind another" -- not whether it has that right with certain programmatic exemptions.

Quite frankly, any exemption to the BBA would complicate its judicial interpretation and make its enforcement more difficult. If the exemption is absolutely necessary (national emergencies, for instance), we of course will go along with it. But the exempt ion for Social Security is not necessary. It's not even desirable.

This chart assumes no legislated change in projected trust-fund income or outlays.


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