UPDATE / SOCIAL SECURITY TRUST FUND : $170-Billion Trust Fund Burning Holes in Needy Federal Pockets : Ideas abound for spending the surplus. Among them: repairing roads and making loans to college students.

What’s the best way to spend $170 billion?

Even as the federal deficit has widened, Social Security reserves have mushroomed, quadrupling since 1986 alone, to $170 billion this spring. With that rising surplus, one of the few bright spots in the federal ledger, all kinds of proposals have been made for its use.

Right now, Social Security surplus funds are invested in government securities, primarily Treasury bonds. The reason for doing so, supporters say, is to put aside some extra funds to help today’s generation of workers finance their own retirement.

Yet the federal government is, in effect, borrowing from Social Security surpluses to help reduce current budget deficits.

Many people, among them Sen. Daniel Patrick Moynihan (D-N.Y.), feel that this is an inappropriate use of the trust funds and have begun to put forth other plans.

Payroll Tax Cut

Moynihan has suggested simply cutting the Social Security payroll tax. Late in September, the Senate is expected to vote on his proposal that the Social Security bite from wages be reduced to 5.1% from 6.2%. Moynihan thinks that the system should “pay as it goes,” by collecting just what it needs for the present and returning any surplus, so that workers can save or invest their money as they see fit.

Other proposals are more elaborate. Their authors say that Social Security should keep collecting money at the same rate, but should use it for creative, ambitious and socially responsible investments.

Infrastructure Repairs

Another bill, presented by Rep. Robert T. Matsui (D-Sacramento), would use the surplus funds to pay for infrastructure repairs nationwide.

Under that plan, a new Social Security Investment Board would buy state and municipal bonds issued to finance the building and repair of bridges, roads and airports.

“The Social Security trust fund and the nation’s infrastructure problems may seem unrelated on the surface,” Matsui said, “but a crucial common thread holds them bound--the future economic well-being of the nation.” Economic productivity is dependent on the infrastructure, Matsui said, and future salaries and contributions to the Social Security system are dependent on productivity.

Matsui’s plan would stipulate that, to prevent over-reliance on Social Security funds, the system could buy no more than 25% of state and municipal bonds nationwide. The President’s Advisory Council on Social Security has criticized Matsui’s plan, however, pointing out that state and municipal bonds usually have a lower rate of return than Treasury bonds, and therefore would earn less interest.

The proposal is being reviewed by the House Ways and Means Committee.

Student Loans

Another plan would have the trust fund invested in higher education through an overhaul of the student loan system.

“What better investment than in the education and training of our young people?” asked Barry Bluestone, principal author of the “education equity” proposal.

The baby boom generation’s retirement after the turn of the century will “create generational antagonism with the baby bust generation, who are going to have to foot the bill for their (elders’) retirement,” Bluestone said. He favors abandoning what he calls the current “baffling array” of student loan and grant programs and lending Social Security funds instead.

Under his plan, students would take out Social Security loans essentially in the same way they now borrow from banks. After graduation they would repay the loans through payroll deductions adjusted to their income.

“The demographic trends over the next half century or so work in favor of the program,” Bluestone said in a recent article. The money can be used now to ensure a well-educated population in the future, he said, so that “30 years from now, when the Social Security system will need those funds to cover its obligations to retirees, education equity will be generating a positive cash flow back to Social Security” from payment on the loans.

His idea has not yet been proposed as legislation, but several lawmakers have expressed interest in it, Bluestone said.