Commentary

Debt Repayment and Social Security

By Andrew G. Biggs
March 8, 2000
Congressional Republicans propose using projected budget surpluses to retire the $3.6 trillion national debt by 2015. President Clinton wants to do it by 2013. After decades of deficit spending, a “debt-free America” sounds inviting. But the best use of any surplus tax revenue is to help establish personal retirement accounts as part of Social Security reform.

The House Republican leadership plan would devote all Social Security payroll tax surpluses as well as a portion of projected on-budget surpluses to debt reduction. “If we eliminate this debt, that money can be freed up for use on other priorities like tax relief, investing in our schools, or fortifying our national debt,” said House Speaker Dennis Hastert.

Retiring public debt is good, all other things being equal. But all other things aren’t equal. Policy-makers must consider the competing uses for budget surpluses — the “opportunity cost,” in econo-speak. And three good reasons point to why projected surpluses should go to establishing personal retirement accounts.

  1. A true lock box: Debt repayment today reduces interest costs in the future, freeing resources for other purposes. But who’s to say that those resources will go to Social Security rather than to mohair subsidies, caffeinated chewing gum or whatever else a future Congress decides to spend it on? Personal retirement accounts give workers the security of knowing that their retirement incomes won’t be competing against other government spending priorities. And good-government types will know that we’re not making sacrifices today only to finance more waste tomorrow.
  2. A better deal: It’s not smart to pre-pay a low-interest loan when you could place that money in a high-returning investment instead. Yet that’s exactly what retiring public debt does. Marketable public debt carries an average interest rate of 6.4 percent, while stock returns over the past 75 years averaged 10.3 percent (both figures include inflation). If $3.6 trillion in budget surpluses were invested in the market through personal accounts, the 3.9 percentage point spread between interest and returns would add hundreds of billions of dollars to fund the Baby Boomers’ retirements.
  3. A new investor class: Middle- and upper-class workers invest, but high payroll taxes shut low-income workers out of rising stock markets. The result: increased income inequality. Meanwhile, low-income workers’ almost total dependence on Social Security means they will be hit hardest by its insolvency. Personal retirement accounts could create a new class of low-income millionaires with vested interests in free markets and economic growth. And those new investors would see their retirement security linked to real assets under their ownership and control, not to promises from politicians who will be long out of office when the bills come due.

Now, many supply-side conservatives would rather use budget surpluses for income and capital gains tax cuts. But those tax cuts would not do nearly as much as would personal retirement accounts to promote long-term economic growth, prepare for the fiscal crunch of Baby Boom retirements or expand the capital-owning class in America. Personal retirement accounts are a tax cut targeted at the least advantaged, dedicated to investment and reserved for retirement.

Polls show that the public knows what Congress and the president don’t: that personal retirement accounts should trump debt reduction. An October ABC/Washington Post poll found that 29 percent of respondents favored devoting budget surpluses to Social Security; only 19 percent wanted to reduce the debt. And a recent Gallup Poll found 62 percent support for personal accounts in Social Security, with only 33 percent opposed. If for that reason only, Congress should make Social Security reform featuring personal accounts the first fiscal priority in a post-deficit economy.

Andrew G. Biggs is a Social Security analyst at the Cato Institute.