Rhetoric Aside, Clinton, Congress Fell Short of Fixing Social Security

From what politicians here are saying and doing, you could be forgiven for believing that they are hellbent on saving your Social Security benefits from vaporizing before you collect them.

The Republican majority in Congress moved legislation to put Social Security’s excess tax revenues into a “lockbox,” where they could not be looted to finance other government programs. President Clinton proposed using the excess revenues only to pay down the national debt and put the country on a sound financial footing.

“Republicans have stopped the 30-year raid on Social Security,” House Majority Leader Dick Armey (R-Texas) boasted at one of the almost daily news conferences called by Republicans over the last three weeks to celebrate their effort to shield surplus Social Security revenues from paying for day-to-day government operations.

Measures Left on Table Are of Dubious Value

If you look under the rhetoric, however, you’ll find quite a different story. Quietly and without fanfare, Congress and the president have ruled out proposals that actually would offer hope of heading off Social Security’s rendezvous with financial calamity.

What’s left on the table are two kinds of measures: those that would have no particular effect on Social Security’s financial shape and those that could make Social Security’s problems even worse.

The reasons for this are not particularly obscure. The proposals that offer some promise of improving Social Security’s outlook involve lower benefits or higher taxes--both of which are hazardous to lawmakers’ political health.

The measures still under discussion may be of dubious effectiveness but they have obvious political appeal. They have enabled policymakers to boast of making progress toward solving Social Security’s problems when in fact they are moving in the opposite direction.

The politicians “didn’t accomplish anything” this year, said Stanley E. Collender, a budget specialist at Fleishman-Hillard’s Federal Budgeting Consulting Group here, and their rhetoric “will only complicate” the task of assuring future benefits.

The looming threat to benefits is the retirement of the massive baby boom generation. For now, with the baby boomers in their peak earning years, the payroll tax is generating far more than today’s retirees are receiving in benefits. The result: The program is accumulating a huge surplus.

But when the baby boomers start retiring, the balance will shift. Annual benefit payments will exceed annual payroll tax revenues and will begin drawing down Social Security’s accumulated surplus. The surplus will be exhausted 35 years from now, according to government estimates--and at that point, tax revenues will be enough to pay only 75% of promised benefits.

To Collender and most other analysts, the way to avert this outcome is not particularly mysterious: The government can trim benefits to make them fit within available payroll tax revenues or it can raise taxes or borrowings.

These steps have one thing in common: If they were taken now, relatively small adjustments would do the trick because their effect would compound over the years.

To curtail benefits, Congress could raise the retirement age gradually. (In fact, current law will lift the retirement age in 12 steps, from 65 now to 67 for people born in 1960.) Or it could reduce the annual cost-of-living adjustment in benefits by, say, half a percentage point.

Or on the tax side, lawmakers could increase wages subject to the Social Security component of the payroll tax. The tax is now levied on the first $72,600 in wages. The Medicare component of the tax, by contrast, is applied to all income without limit.

Economists argue that the boom of the 1990s makes this the perfect time to trim benefits. Today’s workers are unusually well positioned to compensate by saving more in their own retirement accounts.

But neither Clinton nor congressional Republicans wanted to embrace such controversial measures. Instead, both seized on “protecting” the trust fund from those who would loot it to pay for other government programs. This strategy avoided any serious action and almost surely confused the public in the bargain.

It is easy to be confused about Social Security. The reason can be traced to an accounting gimmick that the government adopted to hide the cost of the Vietnam War.

Until then, Social Security ledgers were kept separate from the books on the rest of the government’s budget. But in the 1960s, the two sets of accounts were combined so that, thanks to Social Security’s surplus, the overall deficit would appear smaller.

That meant the U.S. Treasury borrowed Social Security’s surplus to help finance its deficit. In effect, it began the practice of using Social Security payroll tax revenues to pay for other programs.

But when Social Security begins running a deficit, the government will have to repay what it has borrowed. As a result, the borrowing “doesn’t have any significant impact” on Social Security’s future, according to Robert D. Reischauer, a budget analyst at the Brookings Institution, a centrist think tank in Washington.

What would have a significant effect, analysts argue, are proposals by both parties to “protect” the Social Security surplus from marauders. Most of the effect would be in the wrong direction.

Clinton would shore up Social Security with billions of dollars of general revenue raised by the income tax. This, he says, would postpone Social Security’s financial day of reckoning by 15 years. What he doesn’t say--but analysts do--is that the longer the day of reckoning is pushed back, the greater will be the gap between Social Security revenues and benefits.

Clinton’s plan to use the Social Security surplus only to pay down the national debt is just another way of saying that he would continue lending the surplus to the Treasury.

The Republicans’ proposal to put surplus Social Security revenues in a “lockbox” would have no effect on the financial soundness of the Social Security system, analysts say. But its effect would be harmful if it lulled policymakers into complacency.

Both sides also initially proposed controversial schemes to channel part of the payroll taxes collected each year into private stocks, which historically have provided higher rates of return than the Social Security program. The Republicans would let individual workers invest the money. Clinton proposed letting the government be the investor, an idea he recently withdrew.

GOP Scored Points in Political Battle

But analysts say that neither of those schemes would help with the underlying problem: that over the longer term, payroll tax revenues are not likely to keep up with the rising cost of keeping benefit levels intact.

For now, Republicans seem to have gained a slight edge in the political battle over Social Security. Party strategists have been gleefully running attack ads accusing Democrats of raiding the Social Security fund because they would not support the GOP lockbox proposal.

Marshall Wittmann, political analyst for the conservative-oriented Heritage Foundation, says that Republicans have managed to “wrestle away from the Democrats a very strong message.”

Given the Republicans’ political edge, Collender has little hope that the debate over how to fix the Social Security system will turn serious any time soon.

“If the projections show that the Social Security system is going to go belly-up by 2034, then they probably won’t get started fixing it until 2033,” he says. “The only thing that happened this past year is that everybody got more confused.”