August 22, 2001

August 22, 2001 | Commentary on Social Security

Social Security & the Budget: Exposing the Myths

No news is good news, the saying goes. But for many politicians in Washington -- especially those who oppose the Bush tax cut and the movement to create personal retirement accounts for Social Security -- bad news is good news.

Specifically, bad news about the economy. Liberals are trying to use the slowdown and the announcement of smaller budget surpluses to discredit the president's tax cut and warn that Social Security's "trust fund" will soon be raided. Conservatives, meanwhile, defend the tax cut but also are raising the alarm on Social Security in an attempt to head off new spending.

Yet this debate is misleading, to say the least, and a distraction from what Congress ought to be focused on -- getting the economy moving again by reducing the size and burden of government. So let's consider some of the myths that are getting thrown around, along with a few facts that are being overlooked amid all the hyperventilating.

The money in the Social Security trust fund can be used to pay future benefits.

The trust fund is full of IOUs -- government bonds that represent nothing more than a claim on future generations. Every dollar that comes in via payroll taxes today is spent on benefits for current retirees, and any extra money goes toward paying down the national debt. In exchange, the government gives Social Security a special type of bond, which future politicians can "redeem" by raising taxes, reducing spending, or taking on new debt.

In short, Social Security doesn't work like a private-sector pension plan. There's no pile of dollars sitting in a safe-deposit box somewhere with your name on it.

As the Clinton administration noted in its 2000 budget, trust fund balances exist "only in a bookkeeping sense ... They do not consist of real economic assets that can be drawn down in the future to fund benefits."

Using the Social Security surpluses for tax cuts or new spending will drain the trust fund.

Regardless of how they're used, all Social Security surpluses are given to the Treasury in exchange for IOUs.

If the program's surpluses are spent on other government programs, the trust fund collects special-issue government bonds. If they're used for tax relief, the trust fund collects the same IOUs. And if the surpluses are used to shrink the national debt, the same thing happens. In other words, the trust fund doesn't change in size, no matter how the surpluses are used. The Treasury could rake the surpluses into a big pile and burn them, and the trust fund would still have the same amount of IOUs.

The tax cut is hurting the economy.

The economy began softening in the middle of last year, months before President Bush took office and long before the tax cut was approved. And none of the pro-growth elements of the tax cut, from repeal of the estate or "death" tax to cuts in tax rates, has been implemented yet. (Yes, the government has been mailing "rebate" checks, but while this may boost consumer spending, it won't increase economic output.)

The tax cut should be delayed, reduced or repealed to help the economy.

The tax cut should be modified -- to make it bigger and to accelerate when the lower rates begin to kick in. It has many good features that will increase incentives to work, save and invest, but these provisions are scheduled to take effect years from now -- which means their benefits will also occur years from now.

The Clinton tax increase boosted the economy in the 1990s and led to a budget surplus.

Tax-cut opponents may claim otherwise, but the Clinton tax increase delayed the economy's resurgence and had nothing to do with the surplus. The Clinton administration's own budget documents show that in early 1995, almost a year and a half after the 1993 tax increase was enacted, budget officials were predicting deficits of more than $200 billion for the next 10 years. Clearly, events after that date -- including the 1997 capital gains tax cut and a temporary cut in government spending -- caused the economy to expand and the deficit to vanish.

If lawmakers really want to protect the Social Security surplus, they should allow workers to shift some of their payroll taxes to personal retirement accounts. But apparently that's not as much fun as using the "third rail" of Social Security for political gain.

Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Social Security

Distributed Nationally on the Knight-Ridder Tribune Wire