Four Keys to Real Social Security Reform
by John Atlee

The Bush semi-privatization proposal is now generally recognized as financially unsound, and it also undermines basic Social Security principles. But the Clinton/Gore plan to "eliminate the national debt by 2013" and use the interest savings to bolster Social Security is open to the same criticism.

Their proposal to pay down the PUBLIC debt with SS surpluses would be entirely offset by the increase in debt to the SS Trust Fund, which is also part of the total (gross) "national debt." And with no debt reduction, there would be no reduction in interest cost in the Federal budget.

Social Security's financial health has four basic problems that are seldom faced squarely in the current political discussion, and not addressed by currently offered "solutions."

  1. As long as SS remains in the "unified" Federal budget it will risk having its Baby Boom reserves used to finance fiscally irresponsible tax cuts or non-tax-financed spending increases. To end that risk, the key requirement is to take the whole SS account -- and also the Civil Service and military trust funds -- completely out of the "unified" Federal budget, the way the Postal Service and most other Federal financial agencies are now excluded, thus ending the need for the deceptive "unified" budget.
  2. SS financial projections are now hostage to ever-changing and unreliable economic forecasts. The present SS "crisis" was initially caused by the pessimistic economic assumptions of the SS Trustees' 1996 annual report. Even then, their "low cost" projection, based on 5% unemployment economic conditions, was financially sound for the full 75 years of the SS projection.

    This problem can best be solved by basing these projections on stable, CBO-standardized economic assumptions, using the 4% unemployment rate mandated as a national policy goal by the Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978." The SS Trust Fund would then be financially sound indefinitely, and could even afford a FICA rate reduction or increase in women's benefits.

  3. The actual financial health of SS is now hostage to recession-induced reductions in its Baby Boom surpluses (i.e., to mismanagement of the economy). The SS Trustees assume that there will be future recessions "of average severity," and factor the assumed effects into their "most likely" financial projections.

    This problem can best be solved by transferring any actual SS surplus shortfall from the standardized 4% unemployment values into the main Federal budget's fiscal balance (surplus or deficit), where they become part of the economically useful "automatic stabilizer effect," rather than reducing the Baby Boom Trust Fund

  4. As long as SS remains in the "unified" budget, the current Baby Boom surpluses are automatically transferred from the Treasury general fund to the SS Trust Fund and invested in special interest-bearing obligations ("bonds") that become part of the total (gross) Federal debt. Then, in effect, the Treasury has to borrow back these surpluses, and use the money "temporarily" for other purposes. Until now, these surpluses have been used mainly to cover main-budget deficits caused by fiscally irresponsible tax cuts, non-tax-financed spending and/or the effect of recessions. If and when the main budget is finally balanced (or in surplus), the SS surpluses can be used for reducing the PUBLIC debt, as Clinton and Gore have proposed, and as the Republicans now agree.

    But current political discussion has not yet seriously faced the problem of how the Treasury will finance the redemption of these SS bonds after 2015 when the Trust Fund will need the money to pay increasing Baby Boom benefits. If, as politically likely, there is no actual main-budget surplus at that time, the Treasury would again have to borrow from the public. And to the extent that the existing public debt has not already been paid down (by the Clinton/Gore proposal), this would cause a new Reagan-like increase in the TOTAL Federal debt.

    This problem can best be solved by permitting the SS Trust Fund to purchase private bonds and mortgages (not stock), the way other federal financial agencies do. Current law permits SS to buy only securities that are guaranteed as to both interest and principal by the US. That limit includes more than generally realized. But since the Trust Fund's Baby Boom reserves are expected to increase from the present nearly one trillion dollars to nearly three trillion by 2015, the scope of permissible securities should be broadened to include at least all-economy index funds of other investment grade securities. Their maturity dates should be "laddered" so they will automatically come due as SS needs the funds for increasing Baby Boom benefits after 2015.

    "Privatizing" the SS debt in this way would have two key advantages:

    1. The huge interest cost savings become available for other budget purposes -- increased social investment spending, tax cuts, or even paying down the PUBLIC debt to reduce interest costs even further. SS interest now costs the budget $60 billion a year, an amount that will increase rapidly during the Baby Boom reserve buildup, to perhaps $150 billion a year by 2015.

      To avoid undue disruption in the financial markets, this switch to private securities should probably initially include only the current surpluses, not the trillion dollars of present assets. But even that could save the budget $10 billion next year and $100 billion by 2015. (And this doesn't even take account of the almost $70 billion a year civil service and military retirement fund interest that will also increase rapidly.)

    2. This reform also avoids the need for the Clinton/Gore public debt pay-down to prepare for the corresponding post-2015 public debt buildup. Moreover, as the Baby BSoom bulge declines, if the present trillion dollars worth of SS bonds are still in the Trust Fund reserve, they also could be privatized, to reduce the TOTAL Federal debt and its interest cost.

      This reform would also bring SS up to 20% higher interest than the present SS bonds, and would prevent misuse of the SS surpluses better than the present "lock box" promises that could so easily be broken.



Posted: July 25, 2000
To IEA home page
http://www.iea-macro-economics.org