The debate surrounding the anticipated budget surplus.
February 19, 1998
in this forum:
Is the Clinton administration using smoke and mirrors to create this so called surplus? If there is a budget surplus, wouldn't it be beneficial to pay down the national debt? What are the key assumptions in the projection of a Federal budget surplus? If a surplus does exist, wouldn't it make sense to give it back to the American people in the form of a tax cut ? Wouldn't it make sense to use this surplus to bolster the long-term solvency of the Social Security system?
February 2, 1998
Budget Director Franklin Raines and Senator Pete Domenici (R-NM) discuss the possible budget surplus.
January 9, 1998
Exploring the possiblities and plausibility of a budget surplus.
August 5, 1997
President Clinton signs a budget deal that will balance the books by 2002.
Experts analyze the budget deal.
Sen. Pete Domenici and Budget Director Franklin Raines discuss the budget agreement .
Browse the NewsHour's coverage of the budget, the White House and the Political Wrap index
Office of Management and Budget
U.S. Senate and House of Representatives
The Urban Institute
Citizens for a Sound Economy
Constantine Koustavous of Brooklyn, NY, asks: Considering that the government is using the Social Security trust funds to account for its budget "surplus," wouldn't it make sense to use this surplus to bolster the long-term solvency of the Social Security system?
Dr. Rudolph Penner, the Arjay and Frances Miller Chair in Public Policy at the Urban Institute, responds:
I disagree with your proposition if your goal is to use the surpluses to maintain the current system and to delay or avoid reform, but the surplus might be used to make reform easier. The current system is basically a pay-as-you-go system in which most payroll tax payments go directly to the elderly and only a small portion is invested in the trust fund for future retirees. In a pay-as-you-go system, retirees only will get a decent rate of return on their contributions if current workers pay more into the system than was paid by the retirees during their working life. That scenario occurred in the past, because the labor force grew, a higher proportion of the labor force was brought into the system as coverage was expanded, the wages on which the labor force paid taxes grew, and taxes paid increased even faster than wages rose because of tax rate increases and increases in the wage base on which taxes were paid. In other words, the current generation is receiving benefits based on the current high payroll tax, even though they faced a much lower tax burden while they were working.
In the future, the labor force will not grow because of low birth rates over recent decades compared to the high birth rates of the baby boom era. Wages are expected to grow more slowly than they did in the first two decades after World War II and there is little sympathy for further increasing the payroll tax burden. As a result, the rate of return to retirees in the future will fall precipitously compared to the rate enjoyed by their predecessors. I do not believe that a pay-as-you-go system is politically viable under these circumstances.
We must reduce our reliance on the current system and begin to move toward a funded system in which people invest in personal accounts that will fund their own retirement. The accounts might be either publicly or privately managed. The problem with such a reform is that one generation of workers would be expected to pay twice -- once to keep benefits flowing to those now retired and once to fund their own retirement. The accumulated surplus could be used to fund a payroll tax cut that would ease this double burden while people gradually transitioned out of the current system.
Mr. James Miller, counselor at the Citizens for Sound Economy, responds:
As much as I would like to see a tax cut, I would be more than willing to see the "surplus" used to address the true crisis of Social Security. As I indicated in the answer to question #1, the Social Security trust fund contains only IOUs on future generations. When the trust fund receipts are needed during the second or third decade of the next century, the need to impose major tax increases will set up intergenerational warfare on a scale we haven't seen since the years of Viet Nam.
We can avoid that outcome by using the current window of opportunity and what surpluses that materialize to do three things. First, insure that those now on Social Security and those not on it yet but whose retirement is dependent on it are protected. Second, convert the present amorphous collectively-owned pyramid scheme into a set of accounts that are owned by those who pay into the social security program. (Instead of using the Web to find out what your promised benefits might be, you will be able to find out how much money your account contains -- or at least what annuity this account will buy.) Third, give people the option of opting out of Social Security and saving for their own retirement by investing the equivalent of their FICA tax in a list of approved vehicles (mutual funds, et cetera), perhaps with some annuity "floor" -- to assure they are provided for in their retirement years, even if their investments fail.