Confusion abounds regarding the Social Security trust fund. Congressional Republicans are running an ad campaign that claims that Democrats would "raid" the trust fund to pay for general government expenditures. Liberal groups such as the Center on Budget and Policy Priorities claim that spending surplus payroll taxes "would not result in any raid on the Social Security trust fund or have an adverse effect on the Social Security benefits that future beneficiaries will receive."
Who, if anyone, is right?
Let's get what the trust fund is straight, once and for all. As PresidentClinton's own budget acknowledges, the IOUs in the trust fund -- specialissue government bonds, really -- "do not consist of real economic assetsthat can be drawn down in the future to fund benefits. Instead, they areclaims on the Treasury that... will have to be financed by raising taxes,borrowing from the public, or reducing benefits or other expenditures. Theexistence of large trust fund balances, therefore, does not, by itself,have any impact on the Government's ability to pay benefits."
So the trust fund cannot delay the need for tax hikes, benefit cuts or anincreased retirement age. We will have to find additional resources torepay the fund's bonds just as surely as we would need those resources topay benefits directly. Given this, does it make "no difference whether thesurplus is used to finance other programs or to pay down debt," as theWashington Post recently declared? Hardly.
The difference is between the obligation to pay benefits and the abilitytopay them. Like borrowing from a credit card, the government's use ofsurplus payroll taxes creates an obligation to repay. And like a creditcard statement, the balance of the trust fund reflects this obligation,currently at $653 billion and slated to rise to over $2.3 trillion. Between2014 and 2034, that's $115 billion in today's dollars to repay every year.As anyone with a credit card balance knows, what really matters is wherethe money is going to come from to pay it. The real issue is not thebalance of the trust fund, but how it can be paid off and how currentbudget surpluses might be used to do it. The liberals' plan for the money-- spend it -- does next to nothing in this regard.
By contrast, using current surpluses to repay public debt would reducefuture interest payments, freeing up resources that might be used forSocial Security. But "might" is the operative word. Social Security wouldhave to compete with other programs for these interest savings. Who's tosay how future Congresses might use this money? In any event, savingswouldbe relatively small, since only low-interest public debt could be retired.
The best way to use today's budget surpluses to cover tomorrow's SocialSecurity benefits is to establish personal retirement accounts forworkers.These accounts, invested in higher-rate stocks and corporate bonds, wouldproduce greater savings than would retiring public debt. Unlike thegovernment bonds in the trust fund, these would be real assets that wouldreduce the need to raise taxes, increase the retirement age or cutbenefits. And since the accounts would be held by workers, the funds couldnot be siphoned off to pay for other programs, as today's surplus taxesareand as tomorrow's interest savings could be.
The obligation to pay future Social Security benefits is worthless unlessthe government has the money to back it up. There are various ways to savetoday's surplus to back up tomorrow's obligations to Social Security.Retiring public debt is one way, establishing personal accounts is evenbetter. But spending the money on today's political priorities -- whetherwe call it "raiding the trust fund" or issuing IOUs -- most certainly isnot.