Social Security: Saving the System
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SUSAN DENTZER: As he sent his proposed fiscal 2000 budget to congress yesterday, President Clinton extolled a new era of economic good tidings, with federal budget surpluses as far as the eye can see. But he underscored that with that windfall came one overwhelming task.
PRESIDENT CLINTON: If we manage the surplus right, we can uphold our responsibility to future generations. We can do so by dedicating the lion’s share of the surplus to saving Social Security and Medicare and paying down the national debt.
SUSAN DENTZER: And “saving” is, in fact, the president’s key word. To repair Social Security and prepare for the coming retirement of the baby boom, he proposes trillions of dollars in new saving by both government and individuals. That plan is now plunging the president into the thick of battle with congressional Republicans over what might be called surplus politics. In effect, it’s a historic debate over how much of the looming budget surpluses should be set aside as savings for the future or given back to taxpayers in the form of tax cuts.
SUSAN DENTZER: Congressional Budget Chairmen Pete Domenici and John Kasich addressed the issue this week.
REP. JOHN KASICH: Cutting taxes is really a moral issue because that means that people have more money in their pocket.
The alternatives are very simple. Do you want to give back to the American people what they’ve overpaid, or do you want to sit it around up here, and say, we’re going to protect it, we’re going to put it on the debt, when essentially it will be spent in the next ten to fifteen years, and there will be no surplus and no tax cuts for 15 years for the American people.
SUSAN DENTZER: In effect, the Republicans proposed to tip the balance of the surplus more toward tax cuts. The president, meanwhile, proposes to tilt more toward saving. He has fully joined the battle with his plan to save Social Security. The core is a proposal to transfer $2.8 trillion over the next 15 years into Social Security’s reserves. That would be over and above the projected $2.7 trillion that is already scheduled to accumulate. The additional money would come from future budget surpluses if those actually materialize and from other government resources if they don’t. Economist Eugene Steuerle says this would be a historic departure from long-standing policy.
EUGENE STEUERLE: Massive amounts of general tax revenues will be transferred into Social Security, and Social Security benefits will be paid, not simply by the Social Security taxpayer, or the individual Social Security taxpayer, but the individual through his or her income taxes.
SUSAN DENTZER: On paper, Social Security’s reserves would double, making the program solvent until about 2050. The mechanics of doubling the reserves are complicated. In essence, the president would add much of the additional $2.8 trillion to the reserves in the form of government bonds. But he would buy back the same amount of government debt from the public so the overall level of treasury debt wouldn’t increase. Deputy Treasury Secretary Lawrence Summers:
LAWRENCE SUMMERS: By 15 years from now, the stock of our debt relative to our income will be lower than at any time in our history since the World War I buildup.
SUSAN DENTZER: Then, through a special change in budgetary rules, the president says the additional reserves would be locked up so they really would be saved for Social Security, rather than used to permit other spending or tax cuts. That approach won an endorsement from Federal Reserve Board Chairman Alan Greenspan.
ALAN GREENSPAN: If we allow these surpluses to run, we are reducing the national debt, and that is a very important element to sustain, because we learn that as the debt goes down, so do long-term interest rates, so do mortgage rates, and indeed economic growth would be materially enhanced as a consequence of that.
SUSAN DENTZER: The president’s plan has two other notable features. First is a proposal to grow the beefed-up Social Security reserves even faster by investing a portion, $700 billion worth, in the stock market. Here’s the rationale: The government securities in the Social Security trust funds earn a low return of about 2.8 percent a year, after adjusting for inflation. In comparison, the largest U.S. stocks have risen in value about 7 percent a year for decades. Summers says Social Security shouldn’t pass up the chance to capture those higher returns.
LAWRENCE SUMMERS: That’s how federal workers pensions are invested. That’s how state and local workers pensions are invested. That’s how it’s done in the private sector.
SUSAN DENTZER: In another notable feature of his plan, the president proposed to shore up Americans’ private retirement savings. He says that’s critical in an era when Americans as a whole are saving at some of the lowest rates in history. To address that, he would devote $500 billion of the budget surpluses to creating new universal savings accounts, or U.S.A.’s. In effect government would provide some of the seed moneys for those accounts as a kind of targeted tax cut.
LAWRENCE SUMMERS: The way those accounts would work is the government for many people would put in a base sum, then additional contributions would be matched, matched depending on their income. For some people, each $1 you contributed, up to $500, would be matched by a $1 contribution from the government. For others, the match rate would be higher. For others, who were of somewhat higher income, the match rate would be lower.
SUSAN DENTZER: No sooner had the president unveiled these ideas than scrutiny and debate over them began. The plan to invest part of the reserves in the stock market drew immediate fire, including from Greenspan, who worried that stock-picking decisions could become politicized and interfere with the economy.
ALAN GREENSPAN: I do not believe that it is politically feasible to insulate such huge funds from governmental direction. I’m frankly just hard-pressed to find what any benefits are in doing it.
SUSAN DENTZER: Among members of congress, however, confusion about the details of the president’s plan reigned. Today Domenici said he still had trouble understanding it.
SEN. DOMENICI: Your accounting is beyond my comprehension and I say that in all honesty. Now, what I think the case is that by putting the money in the way you have discussed it into transferring the debt to the treasury and to the trust fund, I think you have postponed the day when we’ll have to go out and borrow a bunch of money or incur a huge amount of new tax to fix Social Security. I basically don’t think it will work and it defies my comprehension.
SUSAN DENTZER: That confusion aside, some lawmakers complain that the president hadn’t proposed tough enough measures to make the program solvent over the very long haul. Those would probably involve unpopular moves to trim the future growth of Social Security benefits. The president has already agreed that such steps may be necessary, but wants them hammered out on a bipartisan basis.
EUGENE STEUERLE : The numbers are such that retirement and health are scheduled to occupy 80 percent or more of the budget as we move out into the early 21st century. The president’s proposals don’t really deal with this fundamental issue of what these programs should be and how much we can afford them, vis-à-vis other things we may want to do as a nation.
SUSAN DENTZER: The debate will now escalate as lawmakers further digest the details of the president’s budget and flesh out their own Social Security reform and tax cut plans.