August 12, 1999

Congressional Action Points to a Non-Social Security Deficit of More than $20 Billion in Fiscal Year 2000
Actions Undercut Credibility of Promise to Finance the Tax Bill with Large Reductions in Appropriated Programs
by James Horney and Robert Greenstein(1)

Many proponents of the large tax bill that Congress approved August 5 argue that Congress can simultaneously provide a $792 billion tax cut, "wall off" the Social Security surplus, and use all of that surplus to pay down the national debt. Actions Congress has taken in recent weeks, however, undercut that argument; these actions would result in a non-Social Security deficit in fiscal year 2000 and in the use of funds from the Social Security surplus to finance that deficit.

Although recent Congressional efforts to classify routine discretionary appropriations as "emergency spending" have received considerable attention, few have noticed that Congress has adopted other gimmicks which, by themselves, would lead to a non-Social Security deficit in fiscal year 2000. This fact was first pointed out in a little-noticed section of the Congressional Budget Office's July 1 report on its updated budget projections. CBO stated that if Congress continued to use all of the budget gimmicks it had decided on as of July 1, CBO's "projected on-budget surplus of $14 billion in 2000 turns into a deficit of more than $3 billion."(2) Since that time, Congress has proposed more than $11 billion in emergency spending for 2000, moved to adopt additional gimmicks, and passed tax cuts that cost more than $5 billion in fiscal year 2000. Under CBO's assumptions, the policies Congress has now adopted would produce a projected deficit of more than $20 billion in the non-Social Security budget in fiscal year 2000.

CBO Notes that
Non-Social Security Budget is Gone

"The $14 billion [projected non-Social Security surplus] for next year is already gone. We're already projecting a $3 billion on-budget deficit."

Susan Tanaka, CBO associate director for communications, as quoted in National Journal's Congress Daily, July 15, 1999, p. 3.

These developments would not directly harm Social Security or reduce the assets of the Social Security trust funds. (See box on pages 8-9.) But they cast serious doubt on claims that it is possible to wall off the Social Security surplus and cut taxes by $792 billion at the same time. Those who make these claims often point to the Congressional budget resolution passed this spring, which on paper accommodates a tax cut of this magnitude without invading the Social Security surplus. But the budget resolution is not a law, and its numbers depend upon the critical assumption that deep reductions in expenditures for appropriated programs — totaling $775 billion over the next 10 years — will be made. (The $775 billion figure is CBO's estimate of the amount by which the levels of discretionary spending that the budget resolution assumes for the next 10 years fall below the FY 1999 level of non-emergency discretionary spending, adjusted for inflation.)

The first installment of these $775 billion in promised reductions — an initial $25 billion cut — is due in fiscal year 2000. Congressional action on the FY 2000 appropriations bills shows, however, that the Congressional leadership has no plans to make these reductions, despite the fact that the Leadership continues to cite the budget resolution as proof that its numbers add up. At the time Congress adjourned for the August recess, it had taken the following actions which indicate both that the assumed reductions in discretionary spending will not be made and that the non-Social Security budget will be in deficit in fiscal year 2000.

In short, to move other appropriations bills, Congress has: 1) misused the emergency spending mechanism; 2) purposely underestimated the cost of appropriations bills already considered; and 3) shifted billions of dollars from the Labor-HHS-Education bill to the other bills. In addition, Congress has passed a tax cut that would cost $5.3 billion in fiscal year 2000 (and vastly larger amounts in subsequent years). Considering these actions together leads to the conclusion that Congress is on course for a non-Social Security deficit in the coming fiscal year.

Even without taking into account the additional spending that will be required to fund the Labor-HHS-Education appropriations bill at a level that could pass the House or Senate, Congress has demonstrated that the deep cuts in appropriations that the budget resolution assumes will not materialize and that the projected on-budget surplus for fiscal year 2000 is disappearing. CBO projected an on-budget surplus of $14 billion in fiscal year 2000,(3) based on assumptions of strict compliance with the caps, no new emergency spending, and no tax cut. The emergency spending and scorekeeping adjustments adopted so far by the House or Senate will, by themselves, produce expenditures for discretionary programs that exceed the fiscal year 2000 caps assumed by CBO and reflected in the budget resolution by $28 billion. Counting the extra interest costs that would ensue from these additional expenditures, the result is an on-budget deficit of $17 billion in fiscal year 2000 under CBO's assumptions even if a tax cut is not enacted. The $5 billion tax cut in fiscal year 2000 would push the on-budget deficit to $23 billion, despite promises to use all of the Social Security surpluses to pay down the federal debt.


Emergency Designations

Under the Balanced Budget and Emergency Deficit Control Act, spending designated for emergency purposes is not counted against the caps on spending for appropriated (i.e., "discretionary) programs. At least until last year, emergency spending has generally been provided to meet unpredictable needs, such as providing assistance to victims of natural disasters. This has now changed. Designating regular appropriations as emergency spending is a device to circumvent the caps and surreptitiously avoid the reductions in appropriated programs the budget resolution promises.

The misuse this year of the emergency spending designations to make it appear as though Congress is adhering to the caps began in May, with enactment of the Emergency Supplemental Appropriations Act. In addition to providing $13 billion in emergency funding for fiscal year 1999, this legislation provided nearly $2 billion in additional funds for the Defense Department for fiscal year 2000 and designated that money, too, as emergency spending. This $2 billion was appropriated to help cover the costs of increases in military pay and benefits that will take effect in calendar year 2000.

The emergency spending enacted in the supplemental was reflected in CBO's July budget projections, but Congress has been designating additional items as emergency spending since CBO issued its report. As has been widely reported, the House Appropriations Committee has designated the $4.5 billion appropriation for the 2000 census (and the resulting $4.1 billion in outlays in fiscal year 2000) as emergency spending even though the decennial census is required in the Constitution and is hardly unforeseen. Senate Appropriations Committee chairman Ted Stevens has indicated he will agree to this classification of the Census appropriation as emergency spending. In addition, the Senate has voted for $7.4 billion in emergency funding to provide assistance to farmers suffering from low prices and natural disasters (with estimated fiscal year 2000 outlays of $7.3 billion). This funding may more appropriately fall in the emergency category, but it still constitutes spending in excess of the amount assumed by CBO and reflected in the budget resolution. Total emergency spending approved to date by the House or Senate would push discretionary spending up $11.4 billion.


Lowballing the Spending Estimates

The House and Senate Budget Committees also have adopted "scorekeeping adjustments" under which appropriations bills are assumed to cost less in fiscal year 2000 than CBO estimates they will cost.

As a result of these scorekeeping adjustments, if spending from the fiscal year 2000 appropriation bills is said by the Budget Committees to hit the caps exactly, CBO will estimate that discretionary spending is about $17 billion higher than the cap allows and the budget resolution assumes.

The Budget Committees have used scorekeeping adjustments in the past. But never since the discretionary spending caps were established in 1990 have those adjustments exceeded approximately $5 billion in any year.(5)

In combination, the emergency spending and scorekeeping adjustments that the House or Senate has already adopted would result in increased spending for appropriated programs in fiscal year 2000 that is $28 billion above the levels assumed in the CBO budget projections and the Congressional budget resolution. Moreover, this is before additional emergency spending designations or other gimmicks are employed to help the Congressional leadership move the Labor-HHS-Education bill.

Spending in Excess of the Caps for FY 2000 as a Result of Emergency Designations and Scorekeeping Adjustments
Fiscal Year 2000 (outlays in billions of dollars)
Emergency appropriations
     Censusa $4.1
     Agricultureb 7.3
          Subtotal 11.4
Scorekeeping adjustments
     Defensec 9.7
     Transportationc 1.3
     Other non-defensec 2.8
     Spectrum auctionb 2.6
          Subtotal 16.4
TOTAL 27.8
Notes: a. House; b. Senate; c. House and Senate


The Labor-HHS-Education Appropriations Bill

Even with more than $11.4 billion being designated as emergency spending not subject to the caps and $16.4 billion in spending being disregarded through "scorekeeping adjustments," Congress still cannot begin work on the crucial appropriations bill that funds the Departments of Labor, Health and Human Services, and Education. The programs funded in that bill account for nearly one-third of all non-defense discretionary appropriations this year.

The only way that Congress has been able to make some progress on other appropriation bills (only one bill — the Military Construction bill — has actually made it through the entire Congressional process) is by using the gimmicks discussed above and, in addition, shifting billions of dollars needed for the Labor-HHS-Education bill to the other bills. This makes it appear as though more funds are available for the other bills than really is possible under the caps, while leaving too little money to write a Labor-HHS-Education bill that can pass. This shell game has made it impossible to move ahead with the Labor-HHS-Education bill.

A bill that includes reductions of this magnitude has virtually no chance of passing either chamber. For this reason, the Labor-HHS-Education bill has languished in subcommittee on both sides of the Capitol.


Many Americans — and more than a few policymakers — appear to believe that using a portion of the Social Security surplus to cover a deficit in the non-Social Security budget would constitute a raid on Social Security, would reduce Social Security's assets, and impair its ability to pay benefits in the future. Indeed, polls indicate there is a widespread view that a primary reason Social Security faces long-term financing problems is that Social Security trust fund reserves needed to help finance the benefits of future retirees have been depleted by the use of these resources to cover deficits in the rest of the budget.

These beliefs, however, are not correct and appear to be rooted in some misunderstanding of how Social Security finances work. Whether or not the non-Social Security budget runs a modest deficit in fiscal year 2000 of the size described in this paper would have no appreciable effect on either the Social Security trust funds or Social Security solvency. The significance of these deficits is not their effect on Social Security but rather that they demonstrate that the budget resolution assumptions supposedly showing a large tax cut is affordable are untenable.

Social Security Financing and Non-Social Security Deficits

While there have been deficits for years in the non-Social Security budget, the Social Security trust funds have not been "raided." The trust funds now have reserves that total more than $760 billion and are scheduled to rise to $4.5 trillion by 2021. Social Security's long-term financing problems are the result of entirely different factors.

  • 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 expenses that year, the Treasury borrows the surplus funds and provides the trust funds with Treasury bonds in return. This occurs regardless of whether the non-Social Security budget is in deficit or in surplus. Avoiding deficits in the non-Social Security budget does not change this.
  • 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 thus do not diminish the assets the Social Security trust funds hold. The existence of such deficits in recent years is not why Social Security faces long-term financing problems. Those problems are primarily due to demographic changes that will result in more retirees and slower labor force growth in future decades and to increases in average life expectancy. Social Security is projected to become insolvent (i.e., no longer to be able to pay full benefits) in 2034, regardless of whether there are modest deficits in the next few years in the non-Social Security budget. Addressing Social Security's long-term problems entails making changes in Social Security itself; avoiding non-Social Security deficits does not obviate the need for change in the program.

This is not a defense of 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 programs such as Social Security and Medicare in the decades ahead. In addition, paying down the debt now would allow the government to borrow in the future to meet some of the demands of Social Security and Medicare without amassing a level of national debt that would cripple the economy. A $20 billion or $30 billion non-Social Security deficit is too small to make much difference in this regard, however, particularly if it is a temporary phenomenon.

What is disturbing about the prospective non-Social Security deficit we face in fiscal year 2000 under the Republican budget and tax plan is that it would occur in a year for which the budget resolution assumes only a $25 billion reduction in discretionary spending and a tax cut of only a few billion dollars. By 2008, the budget resolution assumes cuts in appropriated programs of $127 billion, and the cost of the tax cut would burgeon to $168 billion. If these assumed cuts in appropriated programs cannot be made but the tax cut is enacted anyway, non-Social Security deficits will become quite large, eventually posing more serious problems for the budget and the economy when the baby boomers begin to retire.

The $792 billion tax cut does have one other implication for Social Security. Because it would consume all (or more than all) of whatever non-Social Security surpluses actually materialize (given realistic, rather than fanciful, levels of spending for appropriated programs), it would leave no non-Social Security surplus funds available for transfer to Social Security. If no funds can be transferred, then the Social Security benefit reductions or payroll tax increases that eventually will be needed to restore long-term Social Security solvency will necessarily be larger. As a result, as noted Social Security scholar Peter Diamond of M.I.T. recently observed, the tax cut Congress approved in early August can be said eventually to entail larger Social Security benefit cuts or payroll tax increases than would otherwise be needed in order to confer large tax reductions that would disproportionately accrue to the nation's wealthiest individuals.



Some proponents of the $792 billion tax cut seek to "have it both ways." When arguing that Congress can provide a tax cut this large and still "lock up" the Social Security surplus, pay down as much or more of the national debt as the Clinton budget would, and have money left over to strengthen Medicare, the proponents use the budget resolution numbers that assume a whopping $775 billion reduction over 10 years in discretionary programs, starting with a $25 billion cut this year. But when they proceed to write the appropriations bills, the $25 billion in cuts fails to materialize.

To "square this circle," Congressional leaders have resorted to using gimmicks in appropriations bills on a hitherto unprecedented scale. On paper, these devices make it appear as though Congress is adhering to the caps. In practice, Congress is evading the caps and exceeding them by tens of billions of dollars, proving itself unable to achieve the first and smallest installment of the 10 years of cuts in appropriated programs that would be needed to accommodate the $792 billion tax cut.

Perhaps the greatest irony concerns the so-called Social Security "lock-box." Many Congressional leaders proclaim they are preserving and protecting Social Security by walling off the Social Security surplus and locking it away. There are three problems with these pronouncements. First, even if such a lock-box were implemented, it would do nothing to preserve and protect Social Security; the lock-box proposals add no resources to the Social Security trust fund and do not extend by a single year the point at which the trust fund is expected to become insolvent. Second, as this analysis shows, the promise not to touch the Social Security surpluses is being broken as Congress writes the appropriations bills. Third, the lock-box legislation the House has passed is largely toothless; if the Budget Committees manipulate the numbers to make it appear as though the non-Social Security budget is balanced even though CBO says otherwise, the lock-box legislation would have no effect.

This picture is reminiscent of the scene in the movie "Casablanca" in which Captain Renault, a local police official, exclaims that he is "shocked, shocked" to discover illegal gambling at a local bar even as employees of the bar stuff his pay-off into his pockets. Today, various Members of Congress declare they have locked away the Social Security surplus and will be shocked by, and stand resolutely against, any effort by President Clinton or others to use that surplus to finance programs, even as they invade the surplus themselves.

End Notes:

1. James Horney recently joined the Center on Budget and Policy Priorities as a Senior Fellow. Until July 12, he directed the budget projections unit at the Congressional Budget Office, which coordinates CBO's estimates of expenditures, surpluses, and deficits. Robert Greenstein is the Center's executive director.

2. Congressional Budget Office, The Economic Budget Outlook: An Update, July 1, 1999, p. 6.

3. In its July 1 report, CBO projected an on-budget surplus of $14 billion in fiscal year 2000. Consistent, however, with the law that designates all Social Security trust fund spending as off-budget, this projection does not count about $3 billion in Social Security administrative expenses as part of projected on-budget spending. Since 1990, however, Congressional budget resolutions have counted those expenses as on-budget expenditures. As a result, CBO projected that the on-budget surplus for purposes of compliance with the budget resolution would be $11 billion.

4. Congressional Budget Office, p. 6.

5. Scorekeeping adjustments such as those the Budget Committees have adopted this year could, in some circumstances, lead to reductions in enacted discretionary appropriations. Under the Balanced Budget and Emergency Deficit Control Act, the Office of Management and Budget is required to estimate the budget authority and outlays resulting from appropriation bills enacted for a fiscal year. If OMB determines that either budget authority or outlays for any category of discretionary spending (there are four categories for 2000) exceed the statutory caps for the year, it is required to implement an across-the-board reduction (known as sequestration) in discretionary funding in that category sufficient to reduce spending to the level of the caps. If the Budget Committees use scorekeeping adjustments to allow additional outlays, OMB could find that outlays exceed the caps and be required to institute sequestration. OMB has estimated, however, that outlays in FY 2000 resulting from discretionary appropriations requested in the President's budget would be $14 billion less than CBO estimates. The Budget Committees thus assume that discretionary outlays can exceed the caps by $14 billion under CBO's estimates without triggering sequestration. The Budget Committees could argue that OMB's estimates may be more accurate (although the recent record of discretionary estimates does not support that view), but they are using OMB projections selectively, adopting them when they serve their purposes and disregarding them otherwise. If the Budget Committee accepted all of OMB's budget projections, rather than just its overall estimate of discretionary outlays, they would have $11 billion less to work with in fiscal year 2000 because OMB's estimate of the on-budget surplus, before policy changes are made, is $11 billion lower than CBO's estimate.

6. Under section 302 of the Congressional Budget Act, the statement of managers accompanying the conference report on the budget resolution allocates the amount of discretionary spending assumed in the resolution to the appropriations committees of each house. The appropriations committees then must divide the total allocated to them among the 13 appropriation subcommittees in the so-called 302(b) allocations. The appropriators are free to revise these allocations to reflect action on bills. The amounts cited here are from the latest revisions to the House 302(b) allocation, made by the House Appropriations Committee on August 4, 1999.