We are now heading into the season when budgets, and budget deficits, become Topic A: Having cut taxes more than they cut spending, the president and Congress created an annual deficit in the neighborhood of $200 billion. And it will grow bigger unless they do something about it.
Inevitably, attention gets around to Social Security, which has come to be regarded as an out-size, almost bankrupt, welfare program (code name, "entitlement") that is a major cause of the huge federal deficits we face as far as the eye can see.
This is simply not true. As the recent Brookings Institution book, "Economic Choices 1984," put it: "Despite the public focus on the rapid growth of the social security problem, it is not the source of the future deficit problem. . . . The basic problem of the deficit lies with the general fund (receipts and expenditures in the non-entitlement part of the budget)."
Social Security spending has grown from 3.1 percent of the gross national product in fiscal 1970 to a projected 4.9 percent in fiscal 1985. But Social Security tax revenue over the same period also has grown, from 3.5 percent in 1970 to 4.9 percent in 1985.
Moreover, as a result of action taken by Congress a year ago, Social Security benefits by 1989 will amount to only 4.6 per cent of GNP, substantialy less than Social Security taxes, which will be 5.3 per cent of GNP. After the year 2000, the system is destined to generate huge surpluses -- in the trillions of dollars, according to economist Barry Bosworth of Brookings.
Like some others focusing on the deficit problem, I have not made this clear. In the first Reagan-Mondale debate, Reagan said that "Social Security has nothing to do with the deficit," because Social Security taxes go into a separate trust fund. I criticized Reagan for that, since taxes and expenditures for Social Security had been lumped together with all other taxes and expenditures in the "unified budget" totals, beginning in 1968.
Reagan's statement was correct in that Social Security "has nothing to do" with creating the deficit. But it sure has a lot to do with financing the deficit. The funds are not "commingled" as I had written; but when the Social Security Fund has a surplus, it winds up holding Treasury bonds (issued at the lowest legal rate), and thus is helping to finance the deficit.
One of my correspondents, Prof. Robert J. Heilman of California State University in Sacramento, writes that if Mondale had been alert, he would have replied to Reagan that if Social Security is not creating the deficit, logic should force the president to acknowledge that the only way to cut the deficit is to attack its main causes: the huge defense costs, and the exploding interest payments on the federal debt.
Heilman complains bitterly about the unified budget concept, which was devised during the Lyndon Johnson years. By adding Social Security receipts to the general fund, LBJ wanted "to hide the (relative) magnitude of federal spending on the Vietnam war." The unified budget was later adopted by Congress, and the budget has been presented this way ever since.
"However, this was not all there was to the political equation that pushed Congress to adopt the new budget approach," Heilman wrote. "Conservative enemies of Social Security . . . wished to see these (Social Security contributions) branded as 'taxes' being paid into a giant federal welfare program, no different from other of the 'tax and tax, spend and spend' welfare state programs they opposed."
Then, any federal deficits could at least be blamed indirectly on the size of these payment programs, or the new code word, "entitlements." By now, most citizens have been brainwashed into believing that entitlement programs are the chief cause of our massive federal debt.
And even those who acknowledge that Social Security is not the cause of the deficit problem think that some changes could make Social Security part of the deficit solution. In an interview, Brookings research director Alice Rivlin suggested that the benefits formula for future recipients could be made slightly less generous, so that the surpluses could be increased. These would bolster reserves against future Social Security needs, or offset deficits that will be building up elsewhere, as in the Medicare program.
But Bosworth, like Heilman, thinks that we should go back to the old "administrative" budget concept that preceded the "unified budget." Economists could still get what they wanted back in 1968, a "macro" sense of the total impact of all spending and revenue on the economy, just by adding trust accounts to the others. But the old "administrative" budget might do a lot for clarity about the real nature of budget deficits, especially down the road when Social Security will be running those huge surpluses.