Divorcing Social Security From Budget: A Smart Move or a $3-Trillion Blunder? : Deficit: A huge surplus in retiree funds is masking federal red ink. A House panel will examine the issue today.

Is Congress about to make a $3-trillion mistake?

To a number of increasingly alarmed budget officials and analysts, that is exactly what lawmakers are about to do with the Social Security system if they go ahead with plans to remove it from the Gramm-Rudman deficit calculations.

An embarrassment of riches is creating the predicament. Social Security is running larger and larger annual surpluses as the system braces for the future retirement of the baby boom generation, and about $3 trillion in extra tax revenues is expected to accumulate over the next 30 years.

At stake in the seemingly arcane debate is whether that money--plus the $9 trillion in interest it is expected to earn--will be left intact when baby boomers start to retire. Both sides claim the high ground of fiscal prudence.

Advocates of divorcing Social Security from the budget argue that the government should not be able to use the growing reserve to help mask the size of the red ink in the rest of the government’s operations. Under current law, money the government borrows from the Social Security fund rather than from the public is not counted as part of the federal deficit. Removing Social Security from the budget, many lawmakers contend, would result in a higher deficit on paper and would put pressure on Congress to trim spending elsewhere.

But opponents of the move worry that exactly the opposite would occur. If the Social Security surpluses no longer contributed to reducing the deficit, they argue, Congress would probably end up passing laws to put them to other uses, such as financing long-term nursing care and other costly new federal programs.

John Cogan, a former deputy director of the Office of Management and Budget who is now a senior fellow at the Hoover Institution in Palo Alto, Calif., says politicians have repeatedly demonstrated they lack the willpower to let Social Security accumulate large surpluses to help meet future obligations.

“Congress has never allowed them to build up in the past,” Cogan says, “and there’s no reason to think they will in the future.”

The current OMB director, Richard G. Darman, warned last week that lawmakers have not learned any lessons from this history. “By taking the surplus out” of the deficit calculations, Darman told reporters, “all you do is open the possibility that the surplus can be spent for anything and everything.”

Whether Social Security counts toward calculating the federal deficit makes little economic difference. Either way, the government’s need to borrow from the public will be reduced by its ability to borrow from the Social Security system.

But the fiscal and programmatic effects could be profound, and belatedly, a few lawmakers are showing signs of unease over them. The House Ways and Means Committee plans to hold hearings on the issue today.

The huge surpluses stem from the 1983 Social Security rescue, when Congress agreed to boost taxes and trim benefits to restore the financial health of the system. Contrary to current myth, however, lawmakers did not realize then that they were setting the stage for the accumulation of trillions of dollars of surpluses.

“It was so far in the future,” Sen. Pete V. Domenici (R-N.M.), once confessed, “that I don’t think we paid much attention to it.”

They are now. The recent drive to remove Social Security from Gramm-Rudman comes from top lawmakers who believe they are pursuing the more fiscally prudent path. Without Social Security’s surplus of roughly $65 billion during the current fiscal year, they note, the federal deficit would be $206 billion instead of the $141 billion projected by congressional budget experts.

“It is time to stop playing games with Social Security and the government’s finances,” said Sen. Ernest F. Hollings (D-S.C.), a co-author of the Gramm-Rudman law. “Until we acknowledge the truth--the true scale and enormity--of our deficits, then we will continue on our current reckless course of do-nothingism, denial and deception.”

Leading Democrats and Republicans generally agree that Social Security should be taken out of the deficit equation.

“This train is moving so fast that I’m afraid it may be unstoppable,” said a top congressional budget staff member who asked not to be identified. “But nobody is looking down the track to point out the wreck we could end up creating.”

The two parties support different versions of legislation to accomplish their purpose.

Hollings and Sen. Daniel Patrick Moynihan (D-N.Y.), with the backing of the Democratic leadership in the House and the Senate, favor immediately redefining the deficit to exclude Social Security. They would simultaneously adjust the annual targets set by the Gramm-Rudman budget law to take account of the deeper hole from which Congress would then have to climb.

Democrats hope their proposal to exclude Social Security would help protect its benefits and increase the political pressure for a tax increase once the public realizes that the deficit in the rest of the budget remains above $200 billion.

Sen. Phil Gramm (R-Tex.), the principal sponsor of the budget law, prefers a proposal that would not tamper with the current targets but instead would impose further limits on the non-Social Security budget after 1993.

Republicans who support Gramm are convinced that his plan can be used to force Congress to hold down spending through the end of the century.

Politicians from both parties, however, are operating from a misunderstanding of the nature of the Social Security surpluses. They mistakenly object that the surpluses are being wasted today because the money is being invested in Treasury bonds, enabling the Treasury to borrow less from elsewhere to finance the national debt.

That would not be changed, however, by divorcing Social Security from the budget. But the deficit would appear larger because money borrowed from Social Security funds would then be calculated as part of the federal deficit.