January 4, 1990
"Social Security as a Tool to Cut Budget Deficit"
San Jose Mercury News
By Timothy Taylor
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ALTHOUGH 1990 is barely newborn, the relationship between Social Security
and the rest of the federal budget is already making its bid to be the most misunderstood
issue of the year.
Here is the background: Because Americans are living longer and retiring sooner,
it became apparent in the early 1980s that Social Security was headed for bankruptcy.
If it didn't go broke almost right away, it would surely sink in red ink when
the baby-boom generation began to retire in the second and third decades of the
21st century. A bipartisan commission proposed and Congress adopted a laundry
list of fixes for the system, of which two steps were particularly important.
The first notable change was to hike up the payroll tax rate for Social Security
and Medicare. The first column of the table below shows the increase in Social
Security tax rates. Because the tax is paid by both the employee and the employer,
the total payroll tax rate is twice as high as shown here.
The payroll tax is imposed on all income earned up to some maximum dollar amount,
shown in the second column of the table. The third column multiplies the first
two columns, showing the highest dollar amount an individual could pay directly
in Social Security taxes. Finally, the fourth column illustrates that even when
the amounts paid in the 1950s and 1960s and 1970s are adjusted to account for
inflation, the payroll tax was still much lower than it has become today.
The second major change enacted in 1983 was to stop Social Security from being
a "pay-as-you-go" system. Social Security had traditionally been a program
that broke even in any given year, collecting money from workers and distributing
checks to retirees. Contrary to popular belief, Social Security did not invest
your money, collect interest on it, and then return it to you.
To avoid bankruptcy in the 21st century, it was agreed to build up a reserve
in the Social Security trust fund. The current generation of workers would not
only pay for the retirement of the current generation of retirees, but it would
help to pay in advance for its own retirement, too.
There were many ironies in the way that Social Security was saved.
For example, just as the federal government was patting itself on the back
for the Tax Reform Act of 1986, which made sure that millions of poor and near-poor
workers would not owe income taxes, it was sharply raising the Social Security
payroll taxes paid by these low-income workers.
Similarly, just as Ronald Reagan and George Bush fought against income tax
increases, they happily endorsed a steady rise in payroll taxes which has offset
the effect of the other income tax cuts. The total federal tax take, combining
income and payroll taxes, was 19.4 percent of GNP in 1980, and will be about 19.3
percent of GNP in 1990.
But the biggest irony of all is that while the federal government seemed unable
to cope with the huge budget deficits of the 1980s, it was simultaneously agreeing
to increase its spending on Social Security and Medicare dramatically (as shown
in the table at right) and also to accumulate hundreds of billions of dollars
in the Social Security trust fund.
The biggest myth about Social Security and Medicare is that accounting sleight-of-hand
can keep it separate from the rest of the budget. Under current federal law, for
example, Social Security is not officially part of the budget, but the surplus
in Social Security helps to reduce the official deficit. Sometime this year, Congress
will probably act on proposals that the "official" deficit should be
calculated without using the Social Security surplus.
From a purely economic point of view, accounting tricks like these make no
difference. The budget deficit is not a problem because it is badly defined, but
because it collects savings (whether domestic or foreign) that might be used for
long- term investment, and uses that money for immediate government consumption.
Economists measure federal debt "held by the public"; and if the government
can borrow from the Social Security trust fund, it has less need to borrow from
the public and the impact of the budget deficit is smaller.
I heard a radio deejay a few days ago complaining that the federal government
was taking our Social Security money and spending it. That's just wrong. In fact,
the rest of the government is borrowing money from the trust fund, but promising
to repay with interest.
However, a promise to repay the debt to the Social Security and Medicare trust
fund can be broken, just as a promise to continue paying the current levels of
benefits to retirees can be broken. The real issue is whether the U.S. economy
will be wealthy enough in the future to support its elderly at the level to which
they are intending to become accustomed.
Those who propose excluding the Social Security surplus when calculating the
budget deficit have a hidden agenda; they hope to use the Social Security surplus
as a behind-the-scenes method of deficit reduction. Excluding the trust funds
from the "official" deficit would make the deficit appear bigger, and
thus might add to political pressure for reducing it.
In turn, reducing federal borrowing means that America could borrow less from
abroad, invest more at home, and achieve greater economic growth, the fruits of
which could be spent on future retirees and everyone else.
But it does not speak well for the maturity and sophistication of the American
political system that these sorts of accounting games may be necessary to reduce
|Even adjusted for inflation, the Social Security and Medicare
payroll tax has increased greatly since 1940.
Sources: 1) U.S. Social Security Administration. 2) Henry J. Aaron, Barry P.
Bosworth, and Gary Burtless, "Can America Afford to Grow Old?" Brookings
Institution, Washington, D.C., 1989. 3) Price deflators from Dept. of Commerce,
Bureau of Economic Analysis.
|A BIGGER BITE
|Annual spending on Social Security and Medicare, given here in
billions of dollars, has increased dramatically as a share of federal spending.
% of fed.
(s1) Estimated figures.
Source: Historical Tables, Budget of the United States Government, Fiscal Year
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