The Balanced Budget Amendment and Social Security
Debate is now underway on a proposal to write a balanced budget requirement into the Constitution. Part of this debate focuses on the effect the balanced budget amendment would have on Social Security.
Most of the discussion of the amendments potential effects on Social Security has centered on whether the amendment would lead to cuts in Social Security checks as part of the effort to balance the budget. But the most important issue that warrants examination in assessing the amendments effects on Social Security is how the amendment would affect Social Securitys financing when the baby boom generation retires.
Starting when the baby boom generation retires, the ratio of workers to retirees will fall to low levels. This poses difficulties for Social Security, since the payroll taxes that current workers contribute pay for the benefits that current retirees receive.
Both the 1977 and 1983 changes in Social Security represented important steps toward addressing this issue. These changes effectively moved Social Security from a pure "pay-as-you-go" system to one under which the baby boomers would contribute more in advance toward their own retirement. As a result, the Social Security system is now building up reserves. By 2019, these reserves will equal nearly $3 trillion.
But after that, as the bulk of the baby boom generation moves into retirement, it would be necessary under present law to draw down the reserves (although it is likely Congress will act to bolster Social Securitys finances by reducing benefits or increasing revenues before then, thereby causing the reserves to grow larger and last longer than the 2019 point indicated under current projections). This building-up of the reserves while most baby boomers are still working and drawing down of the reserves after the baby boomers retire is akin to what families do by saving for retirement during their working years and drawing down their savings after they reach retirement.
This approach also has another important attribute. If the Social Security surpluses were to be used in the next two decades to increase national saving rather than to offset the deficit in the rest of the budget, that would likely result in stronger economic growth, which in turn would better enable the country to afford to support the baby boomers when they reach their twilight years.
To pursue this approach, the deficit in the non-Social Security budget will need to be reduced significantly or eliminated in coming years so the surpluses in the Social Security trust funds contribute in whole or large part to national saving and further reforms in Social Security will need to be instituted to restore it to long-term actuarial balance.
The Balanced Budget Amendment and Social Security
Unfortunately, the principal version of the balanced budget amendment coming before Congress the version introduced by Senator Orrin Hatch in the Senate and Reps. Dan Schaefer and Charles Stenholm in the House would undercut this approach to bolstering Social Security. Under this version of the balanced budget amendment, total government expenditures in any year including expenditures for Social Security benefits could not exceed total revenues collected in the same year, including revenues from Social Security payroll taxes. The implications of this requirement for Social Security are very significant.
This version of the balanced budget amendment thus would undercut some of the central achievements of the 1983 Social Security reforms.
One reason the amendment would have this effect is that even though the Social Security trust funds would have been accumulating large balances, drawing down any part of those balances when the baby boomers retired, as would be required under present law, would mean the trust funds were spending more in benefits in those years than they were receiving in taxes. That would result in impermissible deficit spending. Such deficit spending could, in theory, be offset by a corresponding surplus in the rest of the budget. But achieving a sizable surplus in the rest of the budget would be a daunting and possibly unachievable task, especially since Medicare and Medicaid costs also will rise when the baby boomers retire.
Amendment Also Poses Other Problems for Social Security
One other issue also warrants mention. Under the amendment, reductions in Social Security could be used to help Congress and the President balance the budget when they faced a budget crunch. This could lead to too little being done to reduce or eliminate deficits in the non-Social Security part of the budget and unnecessary benefit reductions in Social Security.
At first blush, that may sound implausible politically. But the balanced budget amendment is likely to lead to periodic mid-year crises, when budgets thought to be balanced at the start of a fiscal year fall out of balance during the year as a result of factors such as slower-than-expected economic growth. When sizable deficits emerge with only part of the year remaining, they will often be very difficult to address. Congress and the President may be unable to agree on a package of budget cuts of the magnitude needed to restore balance in the remaining months of the year. Congress also may be unable to amass three-fifths majorities in both chambers to raise the debt limit and allow a deficit.
In such circumstances, the President or possibly the courts may feel compelled to act to uphold the constitutional requirement for budget balance. In documents circulated in November 1996 explaining how the amendment would work, the House co-authors of the amendment Reps. Dan Schaefer and Charles Stenholm wrote that in such circumstances, "The President would be bound, at the point at which the Government runs out of money to stop issuing checks." This would appear to include Social Security checks. As a result, there is some risk that Social Security benefits could be reduced for reasons unrelated to the solvency of the Social Security trust fund when a budget impasse occurred.
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