How To Lock Up The Surplus

Volume IV, Number 2 February 10, 1998

By proposing that "every penny" of prospective budget surpluses be placed in a "reserve" to help ensure Social Security's long-term solvency, President Clinton has seized the budgetary high ground. He has also struck a responsive chord with the American people, who understand that something needs to be done today to avert fiscal meltdown when Boomers retire.

Unfortunately, the closer one examines the President's proposal, the less there is to it. The key word "reserve" consists of nothing more than a promise that, for now, future budget surpluses will not be reduced by changes in legislation. These surpluses in turn will pay back some of the national debt. While economists agree that this would make Social Security's future cost burden easier to bear, the public finds the argument hard to follow. There is, moreover, no commitment to pay back any specific sum, much less the vast sum that would be required to "save" Social Security.

In the end, a proposal so confusing and arbitrary may lose out in competition with plans to cut taxes or increase spending. Can't we think up something better?

Up For Grabs

Let's be clear: Paying down the national debt is sound policy. Not only would it increase future national income by increasing national savings, it would prefund some of Social Security's future costs. In effect, the President proposes to buy back bonds from the public now so that Treasury can resell those bonds to the public starting in 2012, the date the Social Security trust funds are due to begin running operating deficits.

To be sure, the President's proposal would not extend the "solvency" of Social Security beyond 2029. That solvency already presupposes the trust funds can cash in several trillion dollars of Treasury IOUs that are unbacked by any economic savings. The proposal would, however, ease the burden of Social Security on the rest of the budget in the years before bankruptcy.

Some cynics say that the President's proposal is just a ploy to keep Republicans from cutting taxes. But that's unfair: The proposal seeks to raise the bar for all policy initiatives, spending hikes as well as tax cuts, that would reduce currently projected budget surpluses.

The real problem is that merely promising to save what's left over when all other policies have been carried out does not itself constitute a policy. By definition, a surplus is the excess revenue not needed to meet prior commitments -- and so will always be up for grabs.

A Small But Real Step

OMB Director Franklin Raines insists that the President's proposal is the best we can do. There is, he says, no way to build a "lock box" for Social Security.

But of course there is. Congress could establish a new program -- following the President, let's call it the Social Security Reserve -- to which funds would be appropriated to pay down the national debt. These funds would be committed in advance, just like those for any other program. How much should be allocated to the Reserve? Congress could, of course, set the annual funding equal to currently projected budget surpluses. But why not do something at once more ambitious and easier to understand? Why not set it equal to the full amount of Social Security's trust-fund surpluses?

There's one hitch: Congress might prove no more willing to exclude the Reserve's investments from its deficit calculation than it is the investments of the Social Security trust funds. To ensure that it adds to national savings, the Reserve could be set up as a quasi-public entity that is not just off budget, but entirely outside of government. In this case, funds would be invested in private assets instead of buying back the national debt.

Alternatively, Congress could allocate funds pro rata to a system of personally owned worker retirement accounts. Such a reform, however, should ideally be part of an overall plan to create a fully funded Social Security system, and thus could take years to implement. In the meanwhile, let's not dismiss the lock box idea. It would be just a small step toward preparing for the coming age wave. But it would be a real step.


. Last updated: 10 Feb 1998