The Most-Needed Social Security and Budget Reforms
By John Atlee, 6/27/2000

Social Security (SS) is turning out to be a crucial issue in the 2000 campaign, but neither Gore's nor Bush's reform proposals solve the basic problem.

It is important to remember that the present SS "crisis" (and privatization movement) was caused by the SS Trustees' 1996 projection of a 2029 SS Trust Fund "bankruptcy" -- based on economic assumptions consistent with 6% unemployment. But their "low cost" (5% unemployment) projection showed the Trust Fund financially sound for the full 75 years.

Since then, on the basis of more optimistic assumptions, they have extended the "most likely" bankruptcy date to 2037 -- but with their "low cost" (now 4 1/2% unemployment) projection again financially sound for the full 75 years. (A simple chart for use on television showing the effect of these two projections on the Trust Fund would make the significance of their difference very clear to voters.)

Thus, the most basic principle -- and ringing clarion call -- of any truly credible "save SS" program is simple: the financial security of SS should not be hostage to ever-changing and unreliable economic forecasts -- or government economic mismanagement, or diversion of its legally dedicated Baby Boom surpluses to other purposes.

Honoring this principle would actually be quite simple -- and would also facilitate better management of both the budget and the economy:

  1. Take the whole SS account (as well as the related civil service and military retirement accounts) completely out of the main ("unified") Federal budget -- and all its graphic presentations. With these retirement fund surpluses explicitly excluded from references to "the budget surplus," they will no longer be a tempting means of financing fiscally irresponsible deficits, tax cuts or spending increases.
  2. For SS projections, use what the Congressional Budget Office (CBO) calls "standardized" economic and unemployment assumptions. And since we have now had several years of actual unemployment close to 4% -- the long-ignored policy target of the historic Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978" -- we should use this unique window of opportunity to make this 4% unemployment rate the basis for the standardized SS projections.
  3. Transfer to the main Federal budget any economy-caused shortfall of the SS surplus from its 4% unemployment projection.

That recessions tend to reduce Federal tax receipts and increase "safety net" spending is something that economists have long recognized as a valuable "automatic stabilizer" to minimize the severity of recessions. With SS out of the budget, if some future government permits 6% or 10% unemployment, the SS portion of this stabilizing effect will remain in the main budget's deficit, where it can be more easily evaluated, and dealt with politically, rather than reducing the Baby Boomers' Trust Fund.

Insulating SS this way will give Baby Boomers and their children confidence that their retirement benefits will actually be there when they retire -- and expose the false assumptions in other proposals.

But the 4% unemployment projection also has other advantages: it frees up funds to reduce FICA contribution rates (especially welcome to lower income workers) and/or improve women's SS benefits (a growing political demand). Moreover, with SS out of the main federal budget, the Trust Fund could be permitted to invest its current surpluses in higher-yielding, maturity-laddered corporate bonds and securitized home mortgages.

Related Budget Reforms

Treating SS this way suggests how we can also make the main Federal budget more fiscally responsible and understandable:

  1. Taking SS and the other retirement accounts out of the present "unified" budget (which was created in 1968 partly to hide Vietnam War deficits) makes this fiscally irresponsible device no longer useful. Kill it -- so federal financial saving for retirement funds can be clearly recognized as a key independent part of the economy's total financial saving, along with comparable business and local government funds, rather than falsely seeming to reduce the main-budget's current deficits or increase its surpluses.
  2. The SS-free main budget projections, like the SS projections, should be based on "standardized" 4% unemployment conditions, rather than the present ever-changing and unreliable economic assumptions that cause so much confusing political debate.
  3. The Congress-controlled POLICY BUDGET would then be clearly distinguished from the economy-controlled "automatic stabilizer" effect -- which then becomes an analytically important separate statistical entity. The CBO calls this the "cyclical" surplus or deficit, but it would be better referred to as the budget's STABILIZATION ACCOUNT -- to recognize that it could also be managed pro-actively by an economically appropriate, non-political, anti-recession tax cut, if and when needed.

For projecting the budget's Stabilization Account, the Federal Reserve could provide more credible economic assumptions than the present CBO, OMB or private economic forecasts, because the Fed largely controls the economy's growth rate and unemployment rate.

With an economically standardized, SS-free Policy Budget, the political issue of how to use the escalating projected budget surpluses could be debated in a much more fiscally responsible and honest manner that both Congress and the public could better understand. And it could greatly improve policy coordination in these areas between Congress and the White House.

President Clinton could inject these reforms into pre-election debate by presenting a parallel version of his midyear budget in this format.

For further background and implications of these proposals, see Social Security, Budget Surpluses & Their Relationship to the Economy.

A briefer version of this op-ed can be found here.



Written: June 27, 2000
To IEA home page
http://www.iea-macro-economics.org