The secret plan to close the deficit.

Commentary about business and finance.
Jan. 9 2004 1:51 PM

The Unlocked Box

How Bush is plundering Social Security to close the deficit.

Feeding Social Security to the defict
Feeding Social Security to the defict

The International Monetary Fund, which usually frets about runaway fiscal policies in developing countries, yesterday released a report that warned of the dangers to the global economy posed by the United States' lack of spending discipline, its reliance on foreign creditors, and its failure to plan adequately for future government liabilities.

Earlier this week, even as he called for making the Bush tax cuts permanent, Treasury Secretary John Snow pooh-poohed the deficit problem and insisted the government has a plan to improve matters:

Our fiscal situation remains a matter of concern. With major expenditures to protect our nation's homeland security and fight the war on terror, coupled with a recovering economy, we still face a deficit in the $500 billion range for the current fiscal year—larger than anyone wants. But that size deficit, at roughly 4.5% of GDP (compared with a modern peak of 6% during the 80s), is not historically out of range; and it is entirely manageable, if we continue the president's strong pro-growth economic policies and sound fiscal restraint. Indeed, with adoption of the President's policies, our projections show a solid path toward cutting the deficit in half, toward a size that is below 2% of GDP, within the next five years.

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The genial treasury secretary, a former deficit hawk, seems literally incapable of speaking truthfully about the deficit. (The same holds for National Economic Council Chairman Stephen Friedman.) In fact, if we adopt the president's policies—which include a host of new tax cuts and massive new spending programs—the deficit won't fall 50 percent in the next five years. It will grow substantially. And if President Bush and the Republican-controlled Congress weren't already quietly using every penny of the massive and growing Social Security surplus to cover operating expenses—and planning to continue this habit—the deficits would be even larger. 

Back in 1983, as part of a deal to save Social Security from impending demographic doom, Congress enacted legislation to essentially increase payroll taxes and reduce benefits. As a result, the government began to collect more Social Security payroll taxes than it paid out to beneficiaries each year.The theory was that the government would use these surpluses to pay down the national debt. That way, when baby boomers retire—and comparatively more people are collecting benefits while comparatively fewer people are working—the government would be in a better position to borrow the necessary funds to provide the promised benefits.

So much for theory. The reality? For the first 15 years, every penny of the surplus was spent, first by Republican presidents and then by a Democratic president. According to figures provided by the Committee for a Responsible Federal Budget, the surpluses were relatively insignificant for much of this period. Between 1983 and 2001 a total of $667 billion in excess Social Security payroll taxes was spent—about $35 billion per year. It was only in fiscal 1999 and 2000, when the government ran so-called on-budget surpluses, that excess Social Security funds were actually used to retire debt.

In the 2000 campaign, Vice President Al Gore said we should sequester the Social Security surpluses in a "lockbox" to prevent appropriators from spending them. Bush agreed in principle. But that commitment went out the window soon after the inauguration. In his first three budgets, Bush (who had the good fortune to take office at a time when the surpluses were growing rapidly) and Congress used $480 billion in excess Social Security payroll taxes to fund basic government operations—about $160 billion per year!

By so doing, Washington spenders have masked the size of the deficit. For Fiscal 2004—which began in October 2003—if you factor out the $164 billion Social Security surplus, the on-budget deficit will be at least $639 billion, rather close to the modern peak of 6 percent of GDP. And according to its own projections (the bottom line of Table 8 represents the Social Security surplus), the administration plans to spend an additional $990 billion in such funds between now and 2008. That year, according to the Office of Management and Budget's projections, the on-budget deficit will be about $464 billion. Only by using that year's $238 billion Social Security surplus does the administration arrive at a total, unified deficit of $226 billion. And the ultimate on-budget deficit will almost certainly be worse.OMB has proven in the past few years that its projections can't be trusted.

The accounting for Social Security surpluses has always been dishonest. But in the past few years, the Bush administration has made this shady accounting a central pillar of its fiscal strategy. The unprecedented reliance on these funds hides the failure of the administration to ensure that there is some reasonable correlation between the resources it has at its disposal and the spending commitments it makes. Bush & Co. have redesigned the tax system so that collections of the progressive taxes that are supposed to fund government operations—like individual income taxes—have plummeted. Instead, with each passing year we rely for our current needs more on the regressive payroll taxes that are supposed to fund our collective retirement.

The persistence of the administration and its credulous allies in eliding these facts is flabbergasting. Of course, for the Bush administration to give an honest accounting of the deficits, and of the role that Social Security surpluses play in keeping them down, would be to admit the fundamental bankruptcy—no pun intended—of its adventuresome fiscal experiment.

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