Using Tomorrow’s Pensions to Create ‘Surpluses’ Today

Your taxes at work--in wonderland. In Washington, President Clinton and congressional leaders are talking about tax cuts, tax credits and tax reforms made possible by surpluses in the federal budget.

But the budget surpluses don’t really exist. This year, if the government were not using money from the Social Security Trust Fund to finance other programs, the budget would be roughly $96 billion in deficit.

As for proposed tax changes, including one that would reduce taxes for 21 million married couples, they very likely won’t be made.

What is really happening is that the nation is arguing about consuming in summer the nuts that must be saved for winter, about spending pension money today that will be needed for old age tomorrow.

In specific terms, the $1.7-trillion federal budget will be substantially in balance for fiscal 1998, which ends Sept. 30, because the government is counting on $96 billion in excess payroll tax receipts in the Social Security Trust Fund.

The excess occurs because many more active workers are paying into Social Security today than there are retirees collecting benefits. That annual excess of tax payments will continue through most of the first decade of the 21st Century; in 2005, the excess of tax receipts over benefits paid will approach $200 billion.

That’s no accident. In 1982, a commission headed by Alan Greenspan, then a private economist, now chairman of the Federal Reserve Board, hiked payroll taxes so that surpluses would build up in the Social Security Trust Fund and ensure that benefits would be there for the massive baby boom generation, which begins retiring in 2010.

Yet for more than a decade, the government has used those Social Security tax receipts for other purposes. In most recent years, the federal deficit has looked smaller than it really was. Now surpluses are more apparent than real.

And talk of putting aside the surpluses to “save� Social Security, as Clinton phrased it in his State of the Union message, doesn’t make sense. He’s counting the same dollar twice.

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Furthermore, Clinton isn’t really setting aside the Social Security money. His budget includes tax cuts for school construction and roughly $40 billion worth of new programs for education and child care. Those expenditures or tax cuts would be financed by the trust fund or by receipts as yet undetermined from the government’s settlement with tobacco companies.

The Republican congressional leadership also is using illusory surpluses, suggesting tax changes this year to remedy a legal anomaly that forces 21 million couples filing joint returns to pay an average of $1,400 more in taxes than they might if filing separately.

Correcting the marriage penalty is a good idea, but doing so will reduce government tax receipts by $150 billion over five years, says tax expert Lawrence Stone of Irell & Manella, a Los Angeles law firm. That means it won’t be done quickly, he suggests.

In fact, say experts in Washington, no major tax initiative will be passed in this session of Congress.

But status quo can be useful. Fact is, prosperity is bringing a surge of income tax receipts to the federal government. The Treasury has seen a surge of taxes on stock option gains and upper incomes thanks to the rising stock market and general prosperity. Those will put the budget relatively close to balance in future years even without including Social Security taxes.

And so excess Social Security tax receipts, amounting to $600 billion over the next five years, could be used to reduce the national debt, says economist Robert Bixby, director of planning for the Concord Coalition, a Washington-based policy group.

The national debt amounts to $3.8 trillion in Treasury bonds owned by private investors. If the temporary surpluses now piling up in Social Security were used to reduce the debt, the government and society would have more options in terms of borrowing or raising money 10 to 12 years from now when funds will be needed for Medicare and baby boomer benefits.

Others are putting forward ideas to divert part of the payroll tax to individual retirement accounts. Martin Feldstein, an economics professor at Harvard who was an advisor to the Reagan administration, suggests 2% of the payroll tax now paid by individuals be put in accounts invested in stocks and bonds. The result would be a buildup of nest eggs and productive investment for the country.

The idea behind Feldstein’s proposal and that of the Concord Coalition is not to leave the excess receipts accumulating in the Social Security Trust Fund for politicians to use for other purposes. Because if the money is wasted, a devastating choice of massive tax increases or reduced retirement benefits could face the nation in the years after 2010.

The issue is less economic than political and even moral. Economist Herbert Stein of the American Enterprise Institute, who advised the Nixon administration, notes that historically, after debt built up in financing the Revolutionary War, the Civil War and World Wars I and II, the American people paid it down.

In recent decades, however, Americans and the politicians they elect have hesitated over paying the debt or leaving it as a legacy for generations of children and grandchildren to cope with.

Ultimately, politicians and people will probably make wise choices about budget surpluses and reforms of taxes and Social Security. But we should be aware that stakes are high and decisions made today are important.