Reagan's Social Security Assessment Not Entirely Accurate

Article excerpt

""Social Security is running a surplus. Social Security is not part of the deficit problem. It is totally financed by a payroll tax, totally dedicated to that one program. If Social Security spending were reduced, you could not take that money saved and use it to fund some other program.'' - President Reagan, Jan. 18, 1985.

NEW YORK - Despite this statement, the Senate has voted, and Reagan has accepted, a one-year abstention from cost-of-living increases for Social Security recipients.

This ""freeze,'' they claim, will reduce the federal budget deficit by $6 billion in fiscal 1986 and about $22 billion over three years.

So what's going on here?

The answer is that Reagan was both right and wrong in his news conference statement:

- Right that Social Security taxes are earmarked for Social Security benefits and cannot be spent for anything else.

- But wrong that Social Security is not part of the ""deficit problem'' - the particular ""deficit problem,'' that is, that the Senate was trying to solve.

The figure of $213 billion, for instance (said to be the impending 1986 deficit if nothing is done to reduce it) is for the unified federal budget.

It's not well understood that the unified budget, in use since the Johnson administration, comprises all earmarked as well as general tax revenues, plus all expenditures, whether covered by earmarked revenues or not.

That includes both Social Security income and outgo.

The former is, indeed, larger than the latter, producing a surplus. However, Social Security benefit payments still add to the spending total in the catch-all unified budget.

If those benefits are reduced by $6 billion in fiscal 1986, that spending total is reduced. Hence, the unified budget deficit also is reduced by $6 billion (assuming that other expenditures have not been increased).

It's true that the $6 billion cannot be spent for any other purpose. Instead, the Social Security trust fund surplus will be increased by that much; but the surplus is lent to the Treasury for general purposes, reducing the Treasury's need to borrow in the credit markets.

The Treasury repays the trust fund with specially issued securities paying market rates of interest. …