What The President's Plan Does And Doesn't Do

Volume V, Number 3 February 2, 1999

There is much to welcome in President Clinton's plan for "saving" Social Security and Medicare. It is more concrete than expected. And, with its provisions for investing in stocks and setting up personal accounts, it acknowledges that reform must look beyond today's pay-as-you-go paradigm. Hopefully, such ideas can be incorporated into legislation that comes to grips with America's long-term entitlement challenge.

That said, the President's plan doesn't add up to a genuine reform strategy. It makes no attempt to reduce the long-term growth in senior benefits, whose unsustainability is the very reason that reform is now being discussed at all. In fact, it would pile on new benefits -- to widowed and working seniors, and for prescription drugs -- without enacting any new earmarked taxes.

Yes, the White House intends to save most of the large budget surpluses it projects over the next fifteen years, and this could indirectly ease the burden of senior benefits on the budget and the economy. But the White House projections are very rosy -- and even if the surpluses materialize, the President's plan does little to ensure that they will actually be saved. As for extending the solvency of Social Security and Medicare, this is little more than a trust-fund shell game.

The President has put his plan on the table. It needs to be improved. In fact, it needs to be reconstructed. But first it needs to be understood.

The Fiscal Bottom Line

Let's start with what the plan does. Specifically, the plan would credit the Social Security trust funds with $2.8 trillion, or 62 percent of the $4.5 trillion in budget surpluses the White House projects over the next fifteen years. According to the administration, this alone would extend Social Security's solvency from 2032 to 2049, or by seventeen years. The proposal to invest one-fifth of the $2.8 trillion in stocks, which earn higher returns than Treasury bonds, would extend Social Security's solvency by another six years, to 2055. Medicare would be credited with 15 percent, or roughly $700 billion, of the projected surpluses -- extending the solvency of its Hospital Insurance trust fund to 2020. Another 12 percent would go to the President's new "USA" personal retirement accounts, which would supplement (but not substitute for) Social Security benefits. The remaining 11 percent would be earmarked for other spending.

What the plan doesn't do is to change the fiscal bottom line. Under current law, the Trustees project that Social Security and Medicare will cost 32 percent of worker payroll by 2040, nearly twice what these programs cost today. And this may be optimistic. According to the Trustees' "high-cost" scenario, whose key demographic and economic assumptions more closely reflect historical experience, Social Security and Medicare would cost 49 percent of payroll by 2040.

And under the President's plan? Due to the new benefits, Social Security and Medicare would actually cost more. The new Social Security benefits -- eliminating the earnings test and increasing payments to aged widows -- are relatively modest. But a Medicare prescription drug benefit would constitute one of the largest expansions in the program's history.

No Guarantees

While the President's plan does not directly reduce the future cost burden of Social Security and Medicare, it may make that burden easier to bear. If, as the White House proposes, we genuinely save budget surpluses while Boomers are in the workforce, the accumulated capital can later be drawn down to cover rising benefit costs when Boomers retire. In addition, by raising productivity growth, the extra national savings could increase the size of tomorrow's economy.

So much for the theory. In practice, it's doubtful that the President's plan can deliver what it promises. For one thing, the large surpluses the White House anticipates may never happen. Not only do the projections assume that the current expansion will continue indefinitely. They incorporate large budget savings that Congress has yet to enact -- and indeed, has no idea how to achieve. This includes a real dollar cut in domestic discretionary spending over the next five years.

Even if the surpluses do happen, there are no guarantees they won't be diverted to tax cuts or spending hikes. Eighty percent of the money credited to Social Security and all of the money credited to Medicare will simply be lent back to Treasury. The President says that Treasury will use the money to buy down the national debt. But as yet, it's unclear how he intends to ensure this result. The historical track record is far from encouraging. The last time we tried to require the unified budget to run surpluses -- when we moved Social Security off-budget -- we failed completely.

The smaller sums slated for investment in marketable securities are more likely to result in genuine economic savings. But even here there are questions to be raised. What budget rules will prevent the federal government from borrowing against its own Social Security stock investments? Will the USA accounts resemble IRAs, and if so, what will keep households from spending down their old IRAs while they build up new ones?

The President has long said that he wants to construct a credible lock box for Social Security. Unfortunately, it's not clear that he's done so.

Three-Card Monte

Wait a minute, some will say. Doesn't the President's plan extend the solvency of Social Security and Medicare? And won't it therefore give us more breathing room? It does and it will -- and that's the problem.

The one thing the White House guarantees is that the solvency of both programs will be extended, regardless of the burden on the budget and the economy. The credits to the trust funds are fixed in advance, and so will be made whether or not the projected budget surpluses are saved -- or indeed, even materialize. If the President's plan doesn't work as intended, Social Security and Medicare will still get trillions of dollars in extra budget authority -- perhaps making future reform politically impossible. And if the plan does work, it will merely delay the day of reckoning. When the trust funds finally run out, we'll still have to cut benefits or hike taxes -- but by then the changes will be more drastic and sudden.

With Social Security, there's an additional problem -- namely, the White House attempt at three-card monte. The $2.8 trillion credited to Social Security is billed as new savings. But Social Security is already projected to run trust-fund surpluses totaling $2.7 trillion over the next fifteen years. Thus, saving the $2.8 trillion would merely ratify the surpluses Social Security now relies on to pay benefits to 2032. So how does the White House extend its solvency beyond that? By crediting the same money twice: once as a projected trust-fund surplus and again as a projected budget surplus.

Is there any justification for this double-counting? The White House says that the extra credit somehow represents the interest that the rest of the budget will save on the national debt by ratifying the Social Security surpluses. But this is nonsense. Even accepting the logic of trust-fund accounting, why should Social Security gain or lose depending on what the rest of the budget does with the money Social Security lends to it? It would make just as much sense to debit Social Security for the interest that the budget failed to save in the past when it didn't ratify Social Security's surpluses.

Let's be honest: Extending solvency is a choiceless exercise. It's the fiscal equivalent of morphine -- numbing us to the symptoms while leaving the underlying malady untouched. If this is all we care about -- and if we are willing to have Treasury write unsecured checks to Social Security -- why stop where the President stops, in 2055? Why not go further and keep the trust funds solvent all the way to 2075 --or 3075? The reason, of course, is that trust-fund balances merely obligate future taxpayers. They represent promises, but not necessarily real resources that can be used to pay future benefits.

A Work in Progress

Nineteen ninety-nine is supposed to be the year in which America finally faces up to its entitlement challenge. The President has done a great service by putting the issue front and center before the American people.

But the actual plan the President sketched out can only be regarded as a "work in progress," as the President himself would surely admit. Much will have to be remedied, particularly the failure to address the long-term cost problem. As it stands, the plan could do more harm than good -- if it undermines support for other reform proposals that don't avoid the hard choices.


. Last updated: 2 Feb 1999