Social Security and Budget Surplus
By ROBERT A. ROSENBLATT
President Clinton's budget makes a pledge of massive financial resources for America's aging population, with 77% of anticipated future federal budget surpluses reserved to bolster Social Security and Medicare. Another 12% would go for new retirement savings accounts for every worker.
It's a boon for the boomers, with the President promising they will enjoy the two giant federal programs without suffering any significant benefit reductions, but it could mean a big financial burden on the boomers' children, who would have to pay the taxes to maintain these programs. Once the health and retirement programs are accounted for, there is a scant 11% of future surpluses to be allocated among everything else the federal government does, from defense to school aid to interstate highway construction.
TWO-PART EXERCISE
The Clinton plan is a two-part exercise.
First, the bulk of the budget surplus during the next 15 years will be used to pay down the national debt. That means the money coming into the U.S. Treasury beyond what is needed to run the government will be used to buy back government bonds held by the public.
Because the bonds will be redeemed, the amount of money paid out annually for interest on the debt will decline sharply over the 15 years. Economists generally agree that this will help the country's economic growth. When the federal government borrows less, it is easier for private companies and individuals to get loans to build their existing enterprises and start new ones. More money goes into investments, which leads to a bigger economic pie later.
Second, if Congress passes Clinton's plan, the Treasury would place a big new chunk of government securities into the Social Security Trust Fund ($2.8 trillion) and into the Medicare Trust Fund (about $700 billion). Treasury Secretary Robert Rubin calls these securities "first claims" on the assets of the United States. In other words, this is a special commitment of government resources to the funds. It is a promise of general tax revenues to the two trust funds. The extra money will "increase the ability" of Social Security to fulfill its "promised . . . benefit obligations," according to a White House memorandum explaining the Administration proposal.
The Social Security Trust Fund already contains Treasury securities. The national pension program currently runs a surplus, collecting more in payroll taxes than it distributes in monthly benefit checks. The surplus money goes to the Treasury, which in return gives the trust fund special government bonds. When the boomers start retiring, Social Security will cash in these bonds to pay benefits. The bonds will be redeemed and all the money will be used by the year 2032. That's the widely touted "crisis" date, when payroll taxes will be sufficient to pay only 75% of the benefits promised under current law.
SIMPLY $2.8 TRILLION
What President Clinton proposes is simply to place another $2.8 trillion in Treasury bonds in the trust fund, and the date the fund runs out of money would be postponed from 2032 until 2049.
He also called for investing a portion of the Social Security Trust Fund surplus--the money not being paid out for current benefits--in the stock market to gain higher returns than those offered by the Treasury securities. The stock market has been producing long-run returns of about 10% a year, compared with about 6% for Treasury securities. The extra money from stock investments would push the date of Social Security insolvency to 2055.
This part of the Clinton plan--stock market investment by Social Security--will almost certainly be rejected by the Republican Congress, which fears that investment by the government would lead to political interference in the business sector. Congress couldn't keep its hands off the selection of stocks, and would insert itself into issues such as tobacco and the environment, Republicans believe.
Republicans will be much more friendly to Clinton's call for the creation of Universal Savings Accounts (USAs), funded by $536 billion from the federal surplus over 15 years. Every worker would get a share of this money, perhaps $100 or $200 a year, with additional money going to people of low and moderate income, who are least likely to have anything put aside for retirement. If they contribute some of their own cash, the government would match it. This would be an "add-on" personal account, in addition to Social Security.
Republicans like the idea of individual accounts and might be willing to accept this USA proposal on a tryout basis to show that Social Security could someday be replaced by a system of individual accounts. Democrats like it because it heads off any immediate attempt to funnel Social Security taxes into individual accounts.
$700 BILLION IN MEDICARE BONDS
At the same time that it is bolstering Social Security, the Treasury would place another $700 billion in new bonds into the Medicare Trust Fund, now scheduled to run out in 2008. The infusion of cash would extend its lifespan for another decade.
If the surpluses predicted by Clinton's economists actually come to pass, there will be no problem making good on all these bonds. The federal government's interest obligations from its old debt will be way down, so it will be easy to pay interest on the new bonds.
If the federal surpluses don't materialize, however, Washington will still have the obligation to pay off the interest and principal on the Treasury bonds given to the Social Security and Medicare trust funds. The government will have to use general tax revenues to repay the bonds. This means less money will be available for other federal programs, because Social Security and Medicare will have first claim by law.
The President wants to give Social Security and Medicare new financial commitments by keeping current and future beneficiaries happy, but he has not offered any politically painful solutions to keep the programs solvent for the long run.
President Clinton says that his plan to use the surplus in addition to investment in stocks will extend the solvency of the Social Security Trust Fund until 2055, and he is inviting the Republican Congress to negotiate a plan to go the rest of the way toward assuring financial strength until 2075. Those last 20 years from 2055 to 2075 are the hard part that may demand making such distasteful choices as raising the retirement age, cutting benefits or increasing taxes.
NEITHER PARTY ENTHUSIASTIC
Nobody from either party has any enthusiasm for the hard decisions ahead, so Congress could very well leave town and get ready for election year 2000 without doing anything that might disturb the voters.
Republicans welcomed the concept of reserving a large part of the surplus to help Social Security, but also contend that the American people deserve a significant tax cut from the surplus. "While there is bipartisan agreement on reserving 62% of the surplus until Social Security is saved, the heavy lifting on Social Security hasn't even begun," said Clay Shaw Jr., R-Fla., who chairs the Social Security Subcommittee of the House Ways and Means Committee.
On the Senate side, Finance Committee Chairperson William V. Roth Jr., R-Del., said, "I agree with the President that we should set aside a large portion of the surplus to save Social Security. We should first set aside what is needed to shore up Social Security, then pay down the debt and cut marginal tax rates across the board."
Robert A. Rosenblatt, Washington economics correspondent and "Benefits Bob" columnist for the Los Angeles Times, regularly contributes "Potomac Sources" to Aging Today.
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