Great Pretenders

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

November 8, 1999

The great budget Kabuki play seems to be reaching its conclusion. The actors have been engaging in arcane rituals meaningful primarily to themselves and a few aficionados but incomprehensible to the uninitiated. Paradoxically, the one line in this seemingly endless drama that is comprehensible, “We must not raid the Social Security trust fund,” is nonsense. The truth is that the budget debate has nothing to do with Social Security.

The budget debate is about spending in agencies other than Social Security and revenues other than Social Security taxes. Despite two years of more or less serious debate on Social Security reform, that subject is off the congressional agenda. Whatever Congress decides regarding spending of other agencies, revenues flowing into and outlays flowing from the Social Security trust fund will be virtually the same.

The debate will have no perceptible effect on the Social Security surplus, now projected to be $147 billion in FY ’00. Trust-fund bond holdings will increase by that surplus, whatever budget decisions Congress and the White House may make. Most of that surplus will go to repurchase debt now held by the public. A small part of it may be used to buy bonds the Treasury sells to finance the rest of government operations. But as far as Social Security is concerned, the bonds are all the same—they pay interest until they mature or until they are cashed in to cover future Social Security benefits.

Yes, a larger budget surplus will boost slightly national saving and wage growth. Faster economic growth helps Social Security by raising payroll tax revenues. Eventually benefits go up too, but the revenues come sooner. A larger surplus also will slightly lower interest rates. That will hurt Social Security by lowering trust fund interest income. The net effect is tiny.

So why are both parties going around talking trash to the public, saying that they are hell-bent not to “raid” the Social Security trust fund? The reason is that each party is trying to shed political liabilities. Republicans want to stop being regarded as the party that can’t be trusted with Social Security. Democrats want to avoid barbs that they are the party of “tax and spend.”

These two goals collided because of the 1997 budget agreement that set harsh limits on so-called discretionary programs—defense and domestic outlays, other than interest on the debt and entitlements such as Medicare. Both parties were careful to postpone the heavy budgetary lifting until after the 1998 elections, but the bill is now coming due and cannot be paid. Were Congress to adhere to those targets and also to fulfill newer promises to boost defense outlays, domestic discretionary outlays would have to fall by about one-quarter, measured as a share of gross domestic product, between 1998 and 2002. The specific issues revolve around education, law enforcement and agricultural assistance. But the real problem is that both parties want to spend more than the limits they negotiated two years ago will permit and want to blame the other party for violating those limits.

As of early 1998 the overall budget was in surplus. But the surplus existed only because a large Social Security surplus exceeded a smaller deficit in the rest of the budget. To forestall tax cuts or large spending increases, President Clinton committed in his 1998 State of the Union Address to “save Social Security first.” The president’s rhetorical gambit worked magnificently stymieing Republican tax cuts and helping to limit spending increases.

By 1999 a strong economy and a booming stock market led to projections of even larger budget surpluses. The budget excluding Social Security was projected to be in surplus as early as FY ’00—if Congress stuck by those unrealistically restrictive targets enacted in 1997.

Members of both parties now realize that honest cuts large enough to balance the non-Social Security part of the budget are not in the cards. None, however, is prepared to say so in public. Projected surpluses enable Republicans to push tax cuts. Tight budget caps permit them to keep up pressure to down-size government. By promising to balance the non-Social Security budget, Republicans can make the bogus promise not to “raid” the Social Security trust fund, casting themselves as reliable stewards of the nation’s largest and most popular government program.

Not one to surrender uncontested political yardage, the president said that he too opposed raids on Social Security. Democrats also look forward to blaming a Republican Congress for failing to live within previously agreed, if unachievable, spending limits and, yes, raiding Social Security.

And so the nation finds its senior elected officials contemplating phony budget practices that would be laughable in a musical comedy about a tin-pot dictatorship—defining the constitutionally mandated decennial census as an “emergency,” adding a month to the budget revenue calendar, delaying until the next fiscal year payments that are intended to encourage work by the poor and the near-poor and other egregious dodges.

If Social Security were helped in any way by such budgetary contortions, this degrading performance might be worthwhile. But none of the proposals to stay within the budget targets enacted in 1997 would do anything to help Social Security or would “raid the Social Security trust fund.”