Be Funded with Social Security Revenues
by Sam Elkin and Robert Greenstein
The tax cut plan proposed by House Ways and Means Committee Chairman Bill Archer and now being debated in Congress would reduce the total budget surpluses projected over the next decade. To counter calls by the bill's opponents to save the surplus until a Social Security reform plan has been put in place, some Republican supporters of the bill have claimed the surpluses are due to increased income tax receipts, not to the Social Security surplus itself. Representative Bill Thomas, for example, recently claimed that "the surplus is due to higher income tax payments and low inflation, not Social Security receipts."(1)
This statement is misleading for several reasons:
- The Congressional Budget Office projects that without the
reserves building in the Social Security system to support the retirement of future
beneficiaries, there would be no significant surplus until 2006; the non-Social Security
budget currently remains in deficit. The Social Security system is collecting a
high level of income from payroll taxes and interest to build reserves in preparation for
the substantial payments it will have to make when the baby boomers retire. By statute,
these reserves can be used only by the Social Security system. Budget rules embody this
requirement by excluding the Social Security system from official presentations of the
federal budget.
Excluding Social Security, CBO projections indicate there will be deficits totaling $137 billion over the next five years. Over the next ten years, there will be a net surplus of only $31 billion. Since the tax bill costs $80 billion over the next five years and the non-Social Security budget is in deficit over this period, it is clear that using the budget surplus to finance the costs of the tax bill means financing all of the bill's costs over the next five years — and most of its costs for the next 10 years — by borrowing against Social Security reserves.
- Recent increases in income tax receipts have not created a surplus in the non-Social Security budget. They have simply made the deficit in this part of the budget smaller than it otherwise would have been. Rep. Thomas is right that increased income tax receipts have helped improve the fiscal outlook. But despite these higher-than-forecast receipts from income taxes, the non-Social Security part of the budget remains in deficit. It will run no significant surpluses for another eight years. The increased revenue from income taxes has, so far, simply reduced the size of the non-Social Security deficit.
- The Social Security system still faces a long-term funding
problem. Most leading Social Security reform plans entail using all or nearly all of the
surplus for Social Security. Regardless of where the surplus comes from, cutting taxes
before a Social Security reform plan is put into place would make restoring Social
Security solvency more difficult. The most common types of plans to restore
long-term Social Security solvency — including both plans to divert a portion of
payroll tax revenues to individual accounts and plans to invest trust fund revenues in
equities markets to secure a higher rate of return for the trust funds — require use
of the budget surpluses attributable to Social Security.
Under individual account proposals, surpluses would be badly needed to help cover the large transition costs entailed in moving to such accounts. Large transition costs are incurred under such plans because Social Security must continue paying benefits to current and upcoming retirees, but a portion of the payroll tax revenues needed to fund these benefits would be diverted from the Social Security trust funds to individual accounts. Additional funds thus would be needed for a lengthy transition period to pay Social Security benefits for current retirees while building individual accounts for current workers at the same time. Under the proposals that invest a portion of Social Security trust fund reserves in the equities markets, the surpluses would be needed to pay for the purchase of the equities.
In either case, cutting taxes now would deprive the government of resources needed to implement the Social Security solvency plan. If taxes are cut now, less of the surplus will be available for Social Security solvency legislation. That, in turn, will likely require that Social Security reform plans contain larger Social Security benefit cuts or payroll tax increases than otherwise would be needed. The larger the benefit cuts or tax increases required, the harder it is likely to be to generate sufficient support to pass a Social Security solvency plan.
Until a plan is put into place to restore Social Security solvency, the surplus should not be frittered away. Once a Social Security plan has been approved and it is determined whether a surplus remains — and if so, in what amount — debate can begin about what tax cuts and other budgetary initiatives may be appropriate.
That time, however, is not here yet. Until it is, lawmakers should make sure they do not take actions that could have the effect of compromising the retirement security of future generations.
End Notes:
1. Letter from Rep. William M. Thomas to Rep. Charles B. Rangel, September 16, 1998.
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