Debt Repayment and Social Security


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 Securitypayroll tax surpluses as well as a portion of projected on‐​budget surplusesto debt reduction. “If we eliminate this debt, that money can be freed upfor use on other priorities like tax relief, investing in our schools, orfortifying our national debt,” said House Speaker Dennis Hastert.

Retiring public debt is good, all other things being equal. But all otherthings aren’t equal. Policy‐​makers must consider the competing uses forbudget surpluses — the “opportunity cost,” in econo‐​speak. And three goodreasons point to why projected surpluses should go to establishing personalretirement accounts.

  1. A true lock box: Debt repayment today reduces interest costs in thefuture, freeing resources for other purposes. But who’s to say that thoseresources will go to Social Security rather than to mohair subsidies,caffeinated chewing gum or whatever else a future Congress decides to spendit on? Personal retirement accounts give workers the security of knowingthat their retirement incomes won’t be competing against other governmentspending priorities. And good‐​government types will know that we’re notmaking sacrifices today only to finance more waste tomorrow.

  2. A better deal: It’s not smart to pre‐​pay a low‐​interest loan when youcould place that money in a high‐​returning investment instead. Yet that’sexactly what retiring public debt does. Marketable public debt carries anaverage interest rate of 6.4 percent, while stock returns over the past 75years averaged 10.3 percent (both figures include inflation). If $3.6trillion in budget surpluses were invested in the market through personalaccounts, the 3.9 percentage point spread between interest and returns wouldadd hundreds of billions of dollars to fund the Baby Boomers’ retirements.

  3. A new investor class: Middle‐ and upper‐​class workers invest, but highpayroll taxes shut low‐​income workers out of rising stock markets. Theresult: increased income inequality. Meanwhile, low‐​income workers’ almosttotal dependence on Social Security means they will be hit hardest by itsinsolvency. Personal retirement accounts could create a new class oflow‐​income millionaires with vested interests in free markets and economicgrowth. And those new investors would see their retirement security linkedto real assets under their ownership and control, not to promises frompoliticians who will be long out of office when the bills come due.

Now, many supply‐​side conservatives would rather use budget surpluses forincome and capital gains tax cuts. But those tax cuts would not do nearlyas much as would personal retirement accounts to promote long‐​term economicgrowth, prepare for the fiscal crunch of Baby Boom retirements or expand thecapital‐​owning class in America. Personal retirement accounts are a tax cuttargeted at the least advantaged, dedicated to investment and reserved forretirement.

Polls show that the public knows what Congress and the president don’t: thatpersonal retirement accounts should trump debt reduction. An OctoberABC/​Washington Post poll found that 29 percent of respondents favoreddevoting budget surpluses to Social Security; only 19 percent wanted toreduce the debt. And a recent Gallup Poll found 62 percent support forpersonal accounts in Social Security, with only 33 percent opposed. If forthat reason only, Congress should make Social Security reform featuringpersonal accounts the first fiscal priority in a post‐​deficit economy.