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Clinton's Social Security Pledge Holds Off Surplus Spenders

By Clay Chandler and Eric Pianin
Washington Post Staff Writers
Monday, February 9, 1998; Page A09

In just over a week, President Clinton's State of the Union appeal to "save Social Security first" has redrawn battle lines in this year's budget debate.

Before the Clinton address, Republicans and Democrats alike were hatching bold plans for making use of projected surpluses, estimated by government budget analysts to top $200 billion over the next five years and swell to $1 trillion through the next decade.

Some lawmakers saw the windfall as a way to fund new federal programs or build more roads and bridges while others hoped to finance a major tax cut.

But Clinton's State of the Union appeal to "reserve every penny" of future surpluses until he and Congress reach an agreement on Social Security reform has put spenders and tax cutters on the defensive -- at least for now.

Politicians on all sides are scrambling to claim to a much smaller pot of revenue -- about $65 billion by White House estimates -- that might be available to the federal treasury if Congress approves a settlement worked out last year between state governments and the nation's tobacco companies.

But that fight is separate from debate about the surpluses, where Washington seems headed toward a rough consensus. Liberal Democrats, including House minority leader Richard A. Gephardt (D-Mo.), quickly embraced Clinton's proposal to set surpluses aside, pending a deal on Social Security. Last week House Speaker Newt Gingrich (R-Ga.) did the same. Federal Reserve Chairman Alan Greenspan also pronounced his blessing on the idea in an appearance last week before the Senate Budget Committee, while Republicans and Democrats on the panel chanted amen.

Not that the spenders or the tax cutters are giving up. House Transportation and Infrastructure Committee Chairman Bud Shuster (R-Pa.), who enjoys strong support from rank and file Republicans and Democrats, is pressing to use the surplus to provide $25 billion more in highway and mass transit spending over the next five years than is permitted under last year's balanced budget agreement. Sen. Phil Gramm (R-Tex.) and Sen. Robert C. Byrd (D-W.Va.) have introduced a measure in the Senate that would raise highway spending by about the same amount.

House Ways and Means Committee Chairman Bill Archer (R-Tex.), meanwhile, is calling for a $200 billion tax cut over the next 10 years, which would work out to an annual reduction of about $200 a taxpayer. Meanwhile, Rep. Mark Neumann (R-Wis.) is promoting a plan that would split the funds into thirds, allocating the excess revenue in equal parts to tax cuts, increased infrastructure spending and debt reduction.

But because the Social Security program, now projected to run short of funds by 2029 as baby boomers retire, is immensely popular with voters, lawmakers on all sides of the surplus debate feel obliged to portray their proposals as modest.

Clinton's pledge to shore up Social Security "hamstrings anyone with alternative ideas of what to do about the surplus -- whether it's taxing or spending," said John Rother, chief lobbyist for the American Association of Retired Persons.

Thus, while Gingrich says Republicans should keep pushing for a tax cut, he also has recommended that the entire cost of that reduction be offset with spending cuts or increases in other revenue. And an Archer aide describes the Republicans' challenge as drafting "a tax package that is popular, reasonable and credible that would overcome public skepticism about tax cuts."

Gingrich has appointed a seven-member GOP leadership task force to resolve internal party policy disputes over spending and taxes before the budget committee begins drafting a budget resolution this spring.

The group will include Archer, Shuster, House Majority Leader Richard K. Armey (R-Tex.), Appropriations Committee Chairman Bob Livingston (R-La.), Budget Committee Chairman John Kasich (R-Ohio) and Rep. Thomas E. Petri (R-Wis.), another senior member of the transportation committee.

By including Shuster, the leadership hopes to avoid a repeat of last year's bloody internal Republican battle over highway spending, which came close to scuttling a bipartisan budget deal. House and Senate GOP leaders are searching for a way to accommodate more highway spending without tampering with domestic spending caps contained in the 1997 agreement.

Jack L. Schenendorf, the House Transportation Committee's chief of staff, said Shuster's minimum requirement is that future revenues collected through the federal gasoline tax be used for highway construction and mass transit programs, as originally intended. Although the government will collect about $32 billion this year in federal fuel taxes, Congress will spend only about $26 billion on highway and mass transit projects under the budget agreement.

"There are lots of ways to do that" without technically breaching the spending caps, Schenendorf said.

Almost without exception, economists hail the shift in favor of saving federal surpluses rather than using them for new spending or lower taxes. Their fear is that large spending increases or tax cuts could trigger an unwanted bout of inflation and stall the current expansion.

"We have an economy that is operating at a very high level of employment," warns William Dudley, an economist at Goldman, Sachs & Co. "If you cut taxes or run up spending, you could easily overheat the economy and force the Fed to push up interest rates."

Chris Varvares, president of Macroeconomic Advisers Inc. in St. Louis, concurs: "At this point you don't want any kind of demand stimulus to the economy. You have to be careful not to go overboard with tax and spending proposals under any circumstances."

Aides say Clinton envisions using the surplus to pay down the $5.5 trillion federal debt until the Social Security question has been resolved rather than channeling extra revenue directly into the Social Security trust fund, as some have advocated. But from an economic standpoint, the effect of either move would be virtually the same.

Using surpluses to pay down the debt would gradually reduce the government's interest payments, now running at $243 billion each year. Many economists contend that such a move could set in motion a "virtuous cycle" of lower interest rate and faster growth sure to leave the nation with more resources available to finance the burden of the baby-boomers' Social Security benefits in the next century.

If the entire $1 trillion in surpluses projected for the next decade were used for debt reduction, annual interest payments could be cut by as much as $50 billion. And many economists, including Greenspan, contend the interest bill would fall further because interest rates also would decline. If reducing the debt by paying off bonds as they come due were to push down rates even half a percentage point, the yearly interest bill would fall by another $20 billion or more. Interest payments would be smaller still if the economy were to grow more rapidly because of lower interest rates.

"We've come to a unique moment in our economic cycle," said Martha Phillips, director of the Concord Coalition, an anti-deficit group. "We should be making the most of it. It's a time for building our reserves and getting ready. . . . The demographics may never be this favorable again."

Staff writer John M. Berry contributed to this report.

© Copyright 1998 The Washington Post Company

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