October 6, 1999

Would Congressional Spending Plans Avert
a non-Social Security Deficit?
What the CBO Letter Does and Does Not Mean
by James Horney

Considerable confusion has developed following the release on September 30 of a letter to House Speaker Dennis Hastert from Congressional Budget Office Director Dan Crippen. The House Leadership has cited the CBO letter as supporting its contention that it is balancing the non-Social Security part of the budget and thereby averting a "raid" on the Social Security trust funds.

The CBO letter, however, has been misunderstood. The letter does not state that the appropriation bills the Leadership is fashioning would balance the non-Social Security budget. To the contrary, estimates that CBO has issued (which are not discussed in the September 30 letter) show these bills would result in a non-Social Security deficit of approximately $16 billion in 2000.

Such a deficit would not constitute a raid on Social Security. Neither Social Security benefits nor the assets of the Social Security trust funds would be directly affected by a modest non-Social Security deficit of this nature in fiscal year 2000.(1)

What the CBO Letter Says

The CBO letter simply states that a budget plan that produces net discretionary outlays of $592.1 billion (and presumably includes no changes in taxes or entitlement spending) would not use any of the projected Social Security surplus in fiscal year 2000. In other words, under such a budget plan, the non-Social Security part of the budget would be balanced. Given the question to which the Leadership asked CBO to respond — what is the projected non-Social Security surplus if discretionary spending totals $592.1 billion in fiscal year 2000? — CBO's conclusion was straightforward.

 

What CBO's Letter Did Not Say about the Congressional Plan and What CBO's Estimates Indicate about the Plan

The CBO letter does not say the appropriation bills the House Leadership has been moving would hold discretionary outlays in 2000 to $592.1 billion. In fact, CBO estimates those bills would produce outlays totaling $609.5 billion — $17.4 billion more than the $592.1 billion level the Leadership assumed and $29.7 billion more than CBO's baseline level of $579.8 billion. Moreover, this $609.5 billion estimate reflects $8.8 billion in savings from a provision included in the Labor-HHS-Education appropriation bill the House Appropriations Committee approved last week that would delay earned-income tax credit (EITC) refunds.(2) Without those savings, CBO estimates the House versions of appropriation bills would result in $618.2 billion in discretionary spending in fiscal year 2000. If the savings from the EITC delay are included, the House appropriation bills would produce a projected non-Social Security deficit of $16.0 billion under CBO's estimates.

To understand how Congressional actions have turned the projected $14.4 billion non-Social Security surplus into a $16.0 billion non-Social Security deficit, consider the following (see table):

The Non-Social Security Surplus/Deficit for Fiscal Year 2000
Under the House Republican Bills and CBO Estimates
(in billions of dollars)

CBO July 1 Baseline Non-Social Security Surplus

14.4

Changes in outlays based on House action
Discretionary spending
Emergency appropriations

14.0

Directives to lower CBO’s estimate of discretionary outlays

14.4

Directive to count spectrum auction savings

2.6

Appropriations over CBO’s baseline

7.4

Total increase in discretionary spending

38.4

Earned-income tax credit cut

-8.8

Increased interest costs due to a higher level of spending than in the CBO baseline

0.8

Net increase in outlays

30.4

Non-Social Security Deficit Under House Action, as Estimated by CBO

-16.0

— To subtract $14.4 billion in outlays from CBO's estimates of the level of expenditures the appropriations bills will generate in fiscal year 2000;(3) and

— To credit the appropriations committees with having achieved $2.6 billion in savings in fiscal year 2000 as a result of inclusion in the defense appropriation bill of a provision to accelerate a planned 2001 Federal Communications Commission auction of a portion of the electromagnetic spectrum. CBO estimates, however, that this provision will produce no savings in 2000.

As a result of this so-called "directed scorekeeping," appropriation bills that the Budget Committee chairmen present as providing non-emergency spending exactly equal to the CBO baseline would, in fact, exceed that baseline level by $17.0 billion, according to CBO's estimates.

 

Misunderstanding Social Security

A modest non-Social Security deficit now seems inevitable. But despite the statements of Members of both parties, such a deficit would not constitute a "raid" on Social Security. Nor would it weaken Social Security's financial position. The Social Security trust funds are not directly affected by the level of the surplus or deficit in the non-Social Security part of the budget. This matter is widely misunderstood.

When the Social Security trust funds take in more revenues in a year than the trust funds need to pay Social Security benefits and administrative costs in that year, the Treasury borrows the surplus funds and provides the trust funds with Treasury bonds. If there is no deficit in the non-Social Security budget, the Treasury uses the surplus Social Security revenues to pay down debt. If there is a deficit in the rest of the budget, the surplus Social Security revenues are used to cover that deficit, with the remaining surplus revenues going to pay down debt. The Social Security trust funds receive the same amount of Treasury bonds — and thus have the same amount of assets — regardless of whether the Treasury uses the surplus funds to help fund other government programs or to pay down debt. Deficits in the non-Social Security budget consequently do not diminish the assets the Social Security trust funds hold.

This is not a defense of substantial non-Social Security deficits. Using the Social Security surpluses to pay down debt is a sound idea; it is helpful both to the long-term prospects of the economy and to the nation's long-term fiscal health. Doing so increases national saving, which in turn should result in modest increases in the long-term economic growth rate. And a larger economy can more readily afford to provide the resources to finance Social Security, Medicare, and other needs in the future.

Paying down debt also reduces the interest payments the federal government must make on the debt, thereby creating more room in the budget to help finance spending for other programs or tax cuts. Furthermore, paying down debt would give the government more flexibility to borrow in the future to help address the fiscal crunch expected to occur when the baby boomers retire without amassing a level of national debt that could seriously injure the economy.

Paying down debt thus is an important goal to pursue. A $20 billion or $30 billion non-Social Security deficit in fiscal year 2000 is too small, however, to have much effect on long-term economic growth, particularly if such a deficit is a temporary phenomenon.

 

Conclusion

The CBO letter the House Leadership has touted does not affirm that the Leadership has produced a budget and appropriations plan that would achieve balance in the non-Social Security budget. Nor does it contradict analyses indicating that Congressional action on appropriation bills so far this year would produce a non-Social Security deficit in 2000 under CBO's assumptions. Finally, Social Security is not directly affected by whether the rest of the budget is in balance, although achieving a cumulative balance in the non-Social Security part of the budget over the next 10 years is a desirable goal because of the effect that would have on paying down the federal debt.


Endnotes:

1. See James Horney and Robert Greenstein, "A Small Non-Social Security Deficit In Fiscal Year 2000 Would Not Adversely Affect Social Security," Center on Budget and Policy Priorities., September 17, 1999 (/cms/index.cfm?fa=view&id=2156).

2. See Robert Greenstein, "The House Leadership's Proposal to Delay EITC Payments," Center on Budget and Policy Priorities, September 29, 1999 (/cms/index.cfm?fa=view&id=698).

3. The budget committees justify the decision to "lowball" these expenditure estimates by noting that the Administration's estimate of the amount of discretionary program expenditures that would occur in fiscal year 2000 under the President's budget is $14 billion lower than CBO's estimate of the level of discretionary expenditures that budget would produce. This does not mean, however, that the CBO estimate is $14 billion too high.

The bulk of the estimating difference between OMB and CBO regarding the level of FY 2000 expenditures for discretionary programs under the President's budget — some $10 billion of the $14 billion difference — occurs in defense spending. To assume the Administration's lower estimate of defense expenditures will prove more accurate than CBO's is, however, to fly in the face of the historical record. Each year from 1994 through 1998, the Administration's estimate of the level of defense expenditures that would result from enacted appropriations bills was lower than CBO's. And each year, actual discretionary outlays ended up exceeding CBO's estimate. The amount by which actual defense expenditures have exceeded the CBO estimates has averaged $4 billion a year.