March 10, 1989
"Devouring the National Nest Egg"
San Jose Mercury News
By Timothy Taylor
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THE National Economic Commission fell apart like wet cardboard last week. Its goal had been to craft a bipartisan solution to the federal budget deficits. But in the fragmented commission report, the Republican side asserted that President Bush's fuzzy budget proposals would solve the deficit problem, the Democratic side disagreed, and neither side proposed anything new.

In the dim light of this disappointing fizzle, however, all parties did agree on one surprising conclusion. Aiming to balance the federal budget, distant as that goal may seem, is no longer adequate. Instead, the appropriate goal is for the federal government to run a budgetary surplus.

In fact, although no one is making the point too loudly as yet, the federal government must either start running budget surpluses, or jeopardize the financial integrity of the Social Security system.

To understand the harsh reality of that choice, you must understand how the economic links between Social Security and the rest of the federal budget have changed in this decade.

From the 1930s to the early 1980s, Congress set Social Security payroll taxes so that enough money was collected from the working population to support the retirees, and nothing much was left over. In 1982, for example, Social Security took in $148 billion, paid out $156 billion, and had $19 billion saved up from previous years. Social Security had an annual deficit of $8 billion for that year, which contributed a bit to the overall federal deficit of $128 billion. In 1982, it didn't much matter whether Social Security was counted as part of the overall budget deficit. But it matters now.

In 1990, for example, the projected budget deficit appears roughly similar to the $128 billion figure from 1982. But instead of running a deficit of $8 billion, as in 1982, Social Security will run a $69 billion surplus in 1990. The Social Security surplus will shrink the overall budget deficit by one- third. And this surplus is growing like a weed. By 1994, it will exceed $100 billion per year. By the mid- or late 1990s, the Social Security surplus may be large enough to finance the deficit in the rest of the federal budget. Clearly, the more the government can reduce its deficit by borrowing from the Social Security surplus, the less money it has to borrow from foreign investors or suck away from private investors.

But what does the Social Security surplus do for Social Security?

The answer may seem obvious. Today, there are about nine people between the ages of 20 and 64 for every two retirees. In 40 years, when the baby boom generation is retiring, there will be only five people between the ages of 20 and 64 for every two retirees. If Social Security doesn't build up surpluses, the next generation of workers will have to pay much higher Social Security taxes to support its retirees.

But even if Social Security does build up huge surpluses, the next generation of workers could still have to pay high taxes, anyway. After all, the surpluses that are now accumulating are loaned to the rest of the budget. Future workers will have to pay higher income taxes to repay those loans from Social Security, plus the accumulated interest, so the money will be available to support tomorrow's retirees.

This counterexample is intended to make a subtle point: Having a Social Security surplus, or not having one, is really not very important in deciding whether the Social Security system will be financially secure in the future. The important factor is whether the overall U.S. savings rate increases.

This is the truth that the National Economic Commission was not quite ready to speak. If the huge surpluses in the Social Security trust fund end up adding to total national savings, that would mean less borrowing from abroad, more investment, and a wealthier U.S. economy. If this additional savings helped the U.S. economy grow one-quarter of a percentage point faster each year, then the economy will be about one-tenth larger in 40 years than it would otherwise be. (For purposes of comparison, a 10 percent increase in GNP this year would be worth about $500 billion.)

In other words, with a substantial increase in national saving, the country may be wealthy enough in the year 2030 for those five people between the ages of 20 and 64 to support two retirees without open intergenerational warfare.

But judging from the inability of the National Economic Commission to recommend any significant way of reducing the budget deficits, this government and this generation seem to be choosing to save up Social Security surpluses on one hand and borrow offsetting amounts with the other hand.

This sleight of hand will reduce federal borrowing from the public, which needs to happen on its own merits. But it won't fool the dismal Gods of Economic Reality. If today's generation of workers wants to count on Social Security at retirement, then this government and this generation must increase their overall level of national saving.

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