For the past year, this column supported President Clinton's proposal to "Save Social Security First" by deferring any commitment of the projected surplus on the unified budget until the Social Security issue is sorted out. I did this on the assumption that Clinton was serious about this issue, an assumption that I maintained, maybe naively, through the White House Conference on Social Security in December.
I was wrong. President Clinton is not serious about this issue. The plan that Clinton outlined in his recent State of the Union Address, apparently assembled by some wordsmith with a stapler, includes three components:
- About 50 percent of the projected surplus over the next 15 years would be committed to reducing the federal debt owed to the public. This may have better effects on the economy than many other proposed uses of the surplus but would have no direct effect on Social Security. By sleight-of-hand, Clinton would increase the federal debt owed to the Social Security Trust Fund by twice this amount, claiming that this would extend the solvency of this mythical trust fund to the year 2055, but this left-handed bookkeeping would have no substantive effect on anything.
- About 12 percent of the projected surplus would finance a small new complicated IRA. The federal government would put a small fixed amount into Universal Savings Accounts and would then augment individual deposits to those accounts on an income-tested basis. This measure would also have no effect on Social Security.
- Another 12 percent of the projected surplus would be invested in private securities to be held by the Social Security Trust Fund. Clinton proposed a system designed to protect those investments from political pressure, but the record of similar systems is not encouraging. Many state and local pension funds and some national provident funds have been manipulated for political objectives, reducing the rate of return to those funds. Since early in the Clinton administration, the Department of Labor has tried to pressure private pension funds to invest in politically targeted securities. Although this component of the Clinton plan has been the focus of most early criticism, it is the only component that would have any effect, albeit minuscule, on the future funding of Social Security.
This is not a serious plan, and there is no reason for Congress to give it serious attention. My guess is that this plan, like the 1993 Hillarycare plan, will never reach a floor vote.
In that case, where should Congress go from here? The worst response to Clinton's failure to submit a serious proposal would be to act as if Social Security were not a serious issue; this would trigger a frenzy of down-payment spending increases and junk tax cuts that would fritter away the budget surplus. A better alternative would be to do nothing; approve a tight budget, go home, and let the surplus reduce the federal debt until there is a sufficient consensus to resolve the Social Security issue.
The best alternative is to recognize that the projected surplus affords a rare opportunity to resolve the major long-term fiscal issues. And the most important fiscal challenge is to transform Social Security from an unsustainable pay-as-you-go government pension system into a sustainable system of prefunded private retirement accounts. My preference is to use the whole surplus for this purpose, by allowing current workers to opt out of the Social Security system in exchange for the opportunity to invest a substantial part of their payroll tax in an approved private retirement account. In effect, this would be a proportional tax reduction for low- and middle-earnings workers and a lump-sum tax reduction for high-earnings workers, conditional on their opting out of the Social Security retirement system. Using the surplus in this way would not change net national saving; private saving would increase by the amount by which the federal budget surplus was reduced. More important, in contrast to the Clinton plan, this would eliminate the liabilities of the Social Security system for those workers who make use of this opportunity. This year may also be the window of opportunity for this proposal: congressional Republicans are close to agreement on a system of private retirement accounts, and President Clinton has made a sufficient commitment to "Saving Social Security First" that he may not veto a bill incorporating this proposal.
Yes, there are important competing demands for the projected budget surplus. Sorting out Medicare is both more urgent and more complex than reforming Social Security, and a major reform of the federal tax code would have high payoffs, but these issues are not yet ripe; there seems to be no prospect of a near-term consensus on them. President Clinton has made Social Security the priority policy issue of 1999; Congress should do so also. And both Clinton and Congress should have the wisdom and courage to do it right.
This article originally appeared in the March/April 1999 edition of Cato Policy Report.
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