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Take Social Security Off-Budget

By Charles Krauthammer
Friday, May 29 1998; Page A27

The era of budget surpluses dawns, and the pilfering has already begun. Congress has just passed a huge transportation bill that busts the ceilings established by the balanced budget agreement just last year. And President Clinton, for his part, already has signed a bill containing a half-billion dollars of "supplemental" spending to pay for our Bosnia deployment.

This not only broke Clinton's own pledge to save every penny of the surplus for Social Security. By blatantly abusing the loophole for "emergencies" (the Bosnia deployment is already three years old and open-ended), it mocked the deficit reduction rule enshrined in the budget agreements of 1990, 1993 and 1997 that all new spending must be offset by cuts elsewhere.

This spending wasn't. It came out of the surplus.

We are now enjoying a glorious and unique economic moment. We have the lowest peacetime unemployment since 1957. There is no inflation. Clinton has just announced a $39 billion budget surplus for 1998. The Congressional Budget Office estimates that it might run as high as $63 billion. How do we keep from frittering away the current bounty?

Government cannot save its extra money by squirreling it away in a safe-deposit box. But it can do the equivalent by paying down the national debt, now a hefty $4 trillion. But how do you make politicians put away a surplus?

Answer: Hide it. Make it disappear. If there is no apparent surplus, it cannot be frittered away.

A little history. In 1968, in order to pay for the war in Vietnam and pretty up the numbers of a surging budget deficit, President Johnson arbitrarily decided to include Social Security in the budget. Social Security was then, as now, taking in more money every year from workers than it pays out to old folks. It helped LBJ produce balanced books.

During the recent balanced-budget amendment debates, a loud chorus of senators screamed that counting Social Security in the budget constitutes stealing from old folks. It is nothing of the sort. It is merely an accounting convention. In the final analysis, it doesn't matter whether you count Social Security or not. You have either spent the Social Security surplus or you have not.

And we do spend it. It goes immediately to the Treasury for spending on roads and bridges and welfare and soldiers.

Today, the Social Security surplus is at least $100 billion per year. Thus all of the federal budget surplus comes from the Social Security surplus. If you take Social Security off-budget – return to the pre-LBJ practice of counting it separately – the federal budget shows not a surplus of, say, $63 billion but a deficit of more than $37 billion.

Why is this a good idea? Because a federal budget still in deficit is a disincentive to spending. After all, what politician is going to stand up and say, "It is okay to increase spending because it is only coming out of Social Security"?

True, nothing has changed but perception. But in politics perception is everything. With a $35 billion-plus deficit on the books, there will be less temptation to go out and spend billions. We might actually begin paying down some of our huge national debt.

And why is that a good idea? Because $4 trillion is a lot of money. It is not just a lot of money in absolute terms. It is a lot of money in relative terms. It is about 50 percent of U.S. GDP.

Pollyannas say: So what? At the end of World War II, debt was about 110 percent of GDP. Yes. But that was war. We had no choice. And as soon as the war was over and we had the choice, we wisely paid down the debt. By 1981, it was down to 26 percent of GDP.

After that, national debt exploded again. You might justify this as a quasi-wartime necessity. The war was the Cold War, and our increased defense spending certainly helped win it. But that war is over too.

One reason you pay down debt in peacetime is that one day there might again be war – or a depression or some other urgent but temporary need for deficit spending. For our generation, the crunch will be a baby-boom retirement that will produce a huge but time-limited (even we boomers are going to die) drain on the Treasury.

And the less debt we have when that or some other economic disaster hits, the more new debt we will be able to incur safely – i.e., without destroying the value of the dollar – to get us through the emergency.

We have a rare opportunity to reduce the national debt from wartime to peacetime levels and provide a safety cushion for the economy. Let's do it. It starts with an accounting device. Take Social Security off the books.

© Copyright 1998 The Washington Post Company

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