The Social Security rescue plan pending in Congress could create a major new problem for both the federal budget and national economic growth in the 1990s.
The reason is that the rescue plan, which has passed the House and will be voted on by the Senate this week, involves creating a giant surplus in Social Security in the last years of this century and early in the next.
The system will need this stored-up money to help pay benefits to the post-World War II baby boom generation when its members start retiring in about 30 years.
In the meantime, however, the question is what effect these surpluses will have on economic growth.
In the past, Social Security surpluses generally have been offset by deficits in the rest of the federal budget.
However, the House version of the rescue plan would, in a little-noticed provision, split Social Security out of the federal budget five years from now and start accounting for it separately.
Part of the purpose of this is to make it harder to mix Social Security and other tax and spending decisions--harder to use Social Security to obscure and finance deficits in the rest of the budget.
Some say they think this will be good for the economy and free up funds for private investment. But others say they fear that, if not offset, the Social Security surpluses could in some years slow economic growth.
Rep. Bryan L. Dorgan (D-N.D.), who proposed splitting Social Security off from the rest of the budget in the House Ways and Means Committee, said his goal was to remove any "temptation" for a president to reduce budget deficits using Social Security. "Sure, the surpluses can create some fiscal drag, but we have to prepare for what is coming," Dorgan said.
A majority of the National Commission on Social Security Reform, whose recommendations last year led directly to the pending legislation, also proposed taking it out of the budget. Sen. John Heinz (R-Pa.) was one who fought for this, partly in hopes of taking Social Security--which has its own tax--out of other tax and spending politics.
The version of the plan approved by the Senate Finance Committee and now being debated on the floor has no such provision.
The House and Senate Budget Committee chairmen, Rep. James R. Jones (D-Okla.) and Sen. Pete V. Domenici (R-N.M.), economist Alan Greenspan, chairman of the Social Security commission, and David A. Stockman, director of the Office of Management and Budget, have all opposed taking Social Security out of the budget.
So has Alice Rivlin, director of the Congressional Budget Office, who wrote Domenici last week:
"In the long-term . . . inclusion of Social Security in the unified budget does force the Congress to ask the right question: how much can the nation's economy afford for social insurance given competing claims on the economy and given the willingness of taxpayers to pay? Making Social Security a separate entity would unnecessrily narrow this question into 'how high a level of benefits can payroll taxes support?'--a question that ignores competing claims, alternative tax sources, and the burden of other taxes."
Moreover, Rivlin continued, such a step would "establish a bad precedent." In recent months, there have been proposals "to remove all trust funds from the budget (on the principle that their revenues, like Social Security's, are dedicated), all federal retirement programs (because they should not be an annual political football), and national defense (because it is too important to be hostage to cyclical problems).
"In the end, we could have a proliferation of federal sub-budgets, completely eroding the usefulness of the budget as an economic and allocative instrument," she warned.
Her point is that, whether Social Security is in or out of the unified budget, there is no escaping its impact. Some effort will have to be made to consider all federal tax and spending decisions together and--if the Social Security surplus in any given year seems too high--to offset it by lowering other taxes or raising other spending.
Similarly, when the baby boomers start to retire and the trust funds begin to shrink, everything would be reversed. The trust funds still would have large balances, but year by year they would be shrinking. Social Security would be running annual deficits, for which adjustments would have to be made just as for earlier surpluses.
The trust fund surpluses can be invested only in U.S. Treasury securities. Regardless of the budget treatment of Social Security, if the planned surpluses were ignored as other taxing and spending choices were made, federal borrowing from the public would drop in line with the surplus.
If the needs of the Social Security system thus were to lead to generally smaller deficits or larger surpluses in overall federal transactions with the rest of the economy, and if the additional funds made available for private investment raised the level of investment above what it otherwise would have been, long-term productivity growth in the economy might be increased.
Only in that sense can the surpluses be "saved," economically speaking--meaning set aside for investment.
If the government reduces its debt--a form of saving--the government can reduce its future interest cost and therefore have more to spend for other things or have room to cut taxes. But it generally cannot invest in profit-making enterprises that will pay dividends.
The budgetary and economic impact of the baby boom's aging and retirement cannot be avoided by accumulating surpluses that are bookkeeping entries. When that group retires, federal tax burdens are likely to be greater or spending lower, regardless of the tax and spending rates while its members still were working.