Fixing Social Security: Is the Surplus the Solution?
Altig, David E., Gokhale, Jagadeesh, Economic Commentary (Cleveland)
It may seem an attractive proposalthe Administration's plan of using projected budget surpluses to restore Social Security's finances-but it obscures the real trade-off we face in tackling this problem. The proposal is essentially a change in the accounting treatment of surpluses, deficits, and debt held by the public and in the Social Security Trust Fund. It would in no way alter the fundamental imbalance that afflicts the nation's most basic pension program.
On certain topics, confusion perpetually reigns. Everyone has a personal list, of course, but somewhere near the top of most is what to make of any debate that includes the words "Social Security." As the seeds of Social Security reform, planted in President Clinton's January 1999 State of the Union address, begin to flower in the early heat of the political spring, we can expect the surrounding discussion to yield its fair harvest of muddled thinking, mixed messages, and mistaken claims.
One year earlier, the President proposed that "we devote every penny of every future surplus" to saving Social Security. Although recent events in Yugoslavia will inevitably dent the surplus projections calculated prior to the crisis in Kosovo, the President's recommendation remains the front-runner in the race to address anticipated problems in financing future Social Security benefits.
This Economic Commentary evaluates the Administration's recent proposal to restore solvency to the U.S. Social Security system by using projected federal budget surpluses.l Our central message is quite simple: Such an action may seem attractive, but it would obscure the essential trade-offs that we face as a society when addressing the topic of Social Security reform. In particular, we note (as have others) that proposals of this type are largely changes in the accounting treatment of surpluses and deficits. As such, they cannot resolve the fundamental imbalance in our most basic public pension program. Ultimately, hard choices must be made that involve either raising taxes or cutting government expenditures.
Some Simple Accounting: The Unified Budget
To make sense of a complicated proposal, it always helps to strip the problem to its essentials. So we'll construct a very simple example to illustrate the relevant aspects of the accounting.
Here's what we will assume:
In the current period-let's call it "this year"-the government collects $100 in payroll taxes (which are labeled as contributions to the Social Security system). In addition, the government collects another $100 in revenue from sources other than payroll taxes (the income tax, for instance).
On the expenditure side, the government requires $75 to pay this year's Social Security benefits, and $125 for all other forms of spending.
So far, there is nothing too complicated here. The government collects $200 in revenues and has $200 of outlays. On the basis of the unified budget-the accounting convention that lumps Social Security revenues and expenditures with all other categories-the federal budget is in balance, with neither deficit nor surplus.
In the world of federal budgeting, however, Social Security is considered an off-budget item. In our simple example, it is the only such item, and all other revenues and outlays are termed on-budget.2 There are thus two sets of accounts. The deficit or surplus of each is the difference between the receipts and outlays for the categories of spending identified for that account. In our example, the on-budget account is in deficit by $25 ($100 of income-tax revenues less $125 of nonSocial Security spending) and the offbudget in a $25 surplus ($100 of payroll tax receipts less $75 of Social Security benefit payments).
Surplus Mythology I
In principle, it would be possible to completely separate the activities associated with the on- and off-budget accounts. Those responsible for the on-budget account in our example would simply issue enough debt to cover the excess of expenditures over receipts for the current period. …