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American Taxpayers Deserve to Profit From the Federal Budget Surplus—Viewpoints | EPI

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Opinion pieces and speeches by EPI staff and associates.

THIS PIECE ORIGINALLY APPEARED IN (NEW YORK) NEWSDAY ON JULY 4, 1999.   

American Taxpayers Deserve to Profit From the Fedral Budget Surplus

by Edith Rasell

The politics in Washington could produce some fireworks after the 4th when lawmakers return to battle over the budget surplus. The good news is that the size of the surplus over the next 15 years has grown by $1 trillion — from $5 to $6 trillion — just since the February assessment. The bad news is that Clinton proposes to spend very little of the $6 trillion on new programs or services, or even to replace cuts made to existing programs in recent years. Instead, 74 percent of the money would be “locked away” and primarily used to reduce the national debt held by the public.

The main argument for locking up most of the money is to prevent Congress from spending Social Security’s money. True, over the 15-year period, 56 percent of the surplus will come from Social Security. But this money is already safe — it is not being stolen and does not need to be protected from Congress or anyone else. “Locking up” such a large share of the budget surplus will provide no direct benefit to the Social Security program, but it could have a negative effect on the economy and, indirectly, on Social Security as well.

When Social Security is running a surplus, it is required by law to invest the money in U.S. Treasury bonds paying the market rate of interest — the safest asset in the world. Currently the program owns over $760 billion in bonds that paid $49 billion in interest to the fund in 1998, a return of 7.2 percent. When Social Security needs the money to pay benefits to retirees in the next century, the bonds will be redeemed — just as in past years when the total accumulated surplus was shrinking and as the Medicare program (which operates under the same rules) did in recent years.

But in the meantime, while Social Security owns the bonds, the money the government received from selling bonds to Social Security goes into the general fund of the Treasury Department. Treasury then allocates the money according to the Federal Budget approved by Congress and the President. (In 1998, about two-thirds, or $69 billion, of the Social Security surplus was used to reduce the federal debt.) And however it’s used — whether on the military, the environment, or reducing the debt — Social Security’s money remains safely invested in Treasury bonds.

Citizens are properly interested in how the federal government spends its money, but this is a separate issue than the safety of the Social Security surplus. The Social Security surplus is already safely locked up in the surest investment on the planet.

Even the money to be devoted to Medicare, 13 percent of the surplus, would be used to buy Treasury bonds to cover future health expenses — then used by the Treasury to reduce the debt.

Clinton is proposing massive annual reductions in the federal debt, amounting to about $140 billion for the fiscal year 2000. The proposed debt reduction is too large, too inflexible, and too unfair.

Since the money would not be spent but saved, the large reduction in demand for goods and services will slow down economic growth — shrinking, and potentially choking off, the surplus. Additionally, when the economy enters a recession — and one is predictable given the already long length of this business cycle — debt reduction would be economic poison, worsening and lengthening the downturn.

Devoting this large a share of the surplus to debt reduction also means that too little will be available for other domestic programs. In fact, existing budget “caps” are so restrictive that spending in many needed programs will not even keep pace with inflation and population growth. And most new initiatives will be out of the question.

Clinton proposes spending only about 18 percent of the total surplus. About percent would be devoted to new retirement savings accounts, slightly less than 3 percent would be spent on education and other services for children, and slightly more than 3 percent on the military. But after many years of cut-backs and with the largest surpluses in the history of the country on the horizon, these are small crumbs, especially when the gains from the private economy have created only a few big winners, but have left the vast majority just getting by.

Clinton’s proposed pay-off to Social Security from all this debt reduction begins in 2011. At that time, the money the federal government saves due to the reduction in interest payments on the federal debt will instead be spent on Social Security. This will extend the period of time for which Social Security will be able to pay full benefits beyond the current estimate of 2034 (with money to pay 66 percent to 75 percent of benefits thereafter). But, if surpluses shrink in the face of the large and inflexible schedule of debt reduction, this will not be possible.

[ POSTED TO VIEWPOINTS ON JULY 14 ]

Edith Rasell is an economist with the Economic Policy Institute. She is a former family physician and specializes in health care issues