April 21, 2014

Let's Really Save Social Security First

With the election over, the nation's leaders confront an embarrassing fact: After all their promises to "save Social Security first," the pre-election budget deal did anything but. The numbers show that the deal will spend about one-quarter of this year's budget surplus. This should trigger serious discussion about how to ensure that future budget surpluses--in effect, Social Security's trust-fund surpluses--aren't gutted further.

Instead, we are getting more empty gestures. Many in Congress say the solution is to set up a new account at Treasury where budget surpluses would be held in "reserve." Others talk loosely about moving Social Security "off-budget." Either way, surpluses would be left up for grabs--and yet another opportunity to prepare for the Baby Boom's retirement would be squandered.


Another Memo Account

Let's start with the opportunity that's already been squandered: saving the trust-fund surpluses run by Social Security over the last fifteen years. The original idea behind today's trust-fund build-up was that Congress would balance the budget excluding Social Security--in other words, that it would run budget surpluses equal to the trust-fund surpluses. Thus was the trust-fund savings to be translated into genuine savings.

It didn't work out that way. Unfortunately, the Social Security trust funds are simply memo accounts. Since any surplus they run is lent to Treasury, the government is free to spend the money it pretends to save. And this is what it has thus far done, by taxing less and spending more. The result? When the trust funds turn around and try to take money back from Treasury starting in 2013, Congress will have to hike taxes, cut other spending, or borrow from the public to raise the cash.

Now return to the present. Due mostly to a booming economy, the federal government has blundered into its first budget surplus in twenty-nine years. Over the next decade, the CBO projects that budget surpluses will total $1.5 trillion--an amount almost exactly equal to the Social Security surpluses projected over the same period. To genuinely save the trust-fund surpluses, all the government needs to do is save the budget surpluses.

So how would our political leaders accomplish this? The President has again pledged not to spend the surpluses--incredibly, just after raiding the piggy bank. Congress is considering crediting them to a new Protect Social Security Account at Treasury. This too is a sham. Since the new account is just another memo account, it would be no more effective than the existing Social Security trust funds, whose failure to save it is supposed to remedy. Or than the 1993 Deficit Reduction Fund, which has been credited with $500 billion over the past five years--without effecting a single dollar in savings.

To see how the shell game works, imagine a hypothetical revenue dollar. It's first credited to the Social Security trust funds, where it's saved once, then to the Deficit Reduction Fund, where it's saved again, then to the Protect Social Security Account, where it's saved a third time. And after all that, Congress gets to spend it. The hitch is that each dollar of paper savings creates a dollar of paper debt. No matter how many times Congress multiplies the transaction, it still nets to zero.

As for the talk about moving Social Security "off budget," it is devoid of meaning. Social Security is already off-budget, and has been so since 1990--without preventing Congress from spending its surpluses.


Outside of Government

In truth, the only way to ensure that surpluses are saved is to move the money not just off-budget, but outside of government. One possibility is to set up a reserve administered by an independent trustee and invested in marketable securities. The reserve's funding could be set equal to currently projected budget surpluses--or better, to Social Security's trust-fund surpluses. Alternatively, Congress could allocate surpluses to a new system of personally owned worker retirement accounts.

Anything less mocks the promise to get serious about Social Security. Empty gestures won't fool the public, and they won't pay for the Baby Boom's retirement.



. Last updated: 13 Nov 1998