Social Security to the Rescue : Changes Could Free General Funds for Other Government Use

It’s no surprise that President Reagan is unwilling to take the initiative with suggestions for changing Social Security rules. After all, he did make a campaign pledge not to reduce benefits for Social Security recipients. And there’s no surer way for the Democrats to make political hay than for the President to seem to renege on this campaign promise.

But like his pledge to turn to taxes only as a last resort, the President’s campaign remarks on Social Security were carefully worded to leave room for post-election negotiations. Slowing the growth of Social Security benefits by modifying the cost-of-living adjustments is not inconsistent with his campaign promise.

The President went over that ground again in his recent press conference. But after opening the door to a bipartisan approach, he seemed to question whether reductions in future Social Security outlays would actually lower the deficit. A misinterpretation of the relation between Social Security and the deficit could arise because Social Security is funded by a separate payroll tax that is earmarked for that purpose alone. Any surplus of payroll tax receipts beyond what is needed to finance current benefits goes into a special Social Security trust fund and cannot be used to finance spending on other programs.

Some listeners undoubtedly got the false impression that those surplus funds therefore wouldn’t reduce the overall budget deficit. Actually, a slowdown in Social Security spending would directly reduce the deficit.

By definition, the budget deficit is the difference between total government spending (including spending on Social Security) and total government revenue, including the revenue collected by the Social Security payroll tax. So every dollar of reduction in Social Security spending reduces the deficit by a dollar.

This reduction in the deficit is more than just an accounting measure. The direct impact of a reduction in Social Security outlays, like any other reduction in the deficit, is to reduce the government’s borrowing from the private sector. Any Social Security surplus accumulates in the Social Security trust fund where it is invested in government bonds. Therefore, any increase in the Social Security surplus reduces the government’s need to borrow from the public by that amount.

Some might wonder why it is better for the government to borrow from the Social Security trust fund than from the public at large. The important difference is that when the government borrows from the public it competes for funds with businesses and individuals. Since the government always succeeds in the competition to get all of the funds it needs to finance the deficit, private borrowing is crowded out. The resulting reduction in business investment in housing construction is the immediate harmful effect of the deficit.

While it is technically true that surpluses in the Social Security retirement fund can’t be used to finance other government programs, it would be a simple legislative matter to permit the retirement surpluses to come to the rescue of the financially ailing Medicare program. This year, Medicare will receive an infusion of $18 billion of general federal funds, an amount that will soon grow to more than $25 billion a year. Although fundamental reforms of Medicare benefits and financing should be taken to make the Medicare program self-sufficient, a transfer of surplus retirement funds to Medicare can free up general revenue to finance other government programs in the meantime.

A slowdown of future Social Security outlays must be a part of any fair and effective plan for deficit reduction. There is no reason to excuse middle- and upper-income retirees from accepting their share of the burden of deficit reduction. But it would be unfair to permit a change in Social Security cost-of-living adjustments to push even a small number of retirees into poverty. The American Assn. of Retired Persons has recently cited evidence that a one-year adjustment freeze would cause 500,000 retirees to drop below the poverty line.

Such an unacceptable increase in poverty could be avoided at very little cost by exempting low-income beneficiaries from the full freeze. A modification that guaranteed the adjustment change would push no one into poverty would not only be reassuring to the elderly and politically adroit, but also preserve 98% of potential savings from the Social Security slowdown.

A one-year cost-of-living adjustment freeze can be a good start, but it is an inadequate response to the magnitude of the deficit problem. That’s why we favor a multi-year commitment to limit adjustment payments to the excess of inflation over 3%. That for five years would save about $35 billion a year by 1989--enough to make a substantial contribution to deficit reduction.

Congress now must show that it is serious about deficit reduction by recognizing that reducing the deficit will have to be a multi-year effort, and that a threshhold on future Social Security cost-of-living adjustments should be an important part of that multi-year plan.