SORTING OUT THE DEBATE OVER SOCIAL SECURITY SCRIPPS HOWARD NEWS SERVICE Date: Friday, May 28, 1999 Section: Source: By LINDA SEEBACH Scripps Howard News Service Memo: COLUMN ( Linda Seebach is an editorial writer for the Denver Rocky Mountain News in Colorado.) Edition: Debate over how to fix Social Security or even whether it needs fixing - is complicated by widespread public misunderstanding of how it was designed to work. The confusion is increased because the federal budget includes both Social Security and the rest of the government's functions. You've perhaps heard about Washington's "surplus," but only Social Security has a surplus; the rest of the government is still spending more than it takes in. When I'm trying to sort out who owes whom, I like to think about Uncle Sam as a puppeteer, hidden behind a screen. One of his hand puppets is Social Security a grandmotherly type, maybe dressed for golf. The other is Treasury - an investment banker who looks a little like Robert Rubin. Their actions are coordinated, obviously, because the same mind animates both. But when a taxpayer steps up and hands in a dollar, it is unambiguously accepted by one hand or the other. Financial transactions between Social Security and Treasury take place at arm's length. That's the point of the Republican budget resolution to take Social Security out of the federal budget, sometimes called putting it in a lock box. Look at Social Security first. It's sometimes derided as a "Ponzi scheme," an investment scam where the high returns of the first investors come from later investors and the whole thing collapses when there are no more new investors. That's not really fair. Social Security was designed to be "pay as you go," with the benefits paid out each year funded by that year's taxes. If you think you've got money piling up in your Social Security account to pay your benefits, you are wrong. "Pay as you go" is not ideal, but it would work, if the population structure never changed. But when the retirement age was set at 65, in the depths of the Depression, most people died younger than that. No one foresaw a life expectancy in the high 70s, with the typical beneficiary collecting for 15 or 20 years. No one foresaw the Baby Boom, either. As long as Social Security was taking in dollar bills with one hand and giving them out with the other, there was no storage problem. But in the early 1980s, Social Security taxes were raised in anticipation of the boomers' retirement, and the dollar bills started piling up. That's the "Social Security Trust Fund." Social Security can't just stick dollars in her golf bag until they're needed. She needs a return on her cash, so she buys U.S. treasury bonds. Safe, a little dull, but not subject to the political mischief that would ensure if Social Security were buying stocks to the tune of $100 billion a year. Now look at the Treasury puppet. He's selling those bonds because he has to finance the government's operating deficit, not because he wants to oblige Social Security with a place to park her dollar bills. Of course the money is spent immediately on something else. Otherwise, Treasury wouldn't be borrowing it. Treasury still has a deficit to finance; $29 billion in fiscal year 1998, an estimated $13 billion in 1999. But starting in 2000, it too will have a surplus. Economist Larry Kudlow and Stephen Moore, fiscal policy analyst for the Cato Foundation, estimate it will amount to more than $500 billion over the five years 2000-2004. The surplus comes from sharply increased taxes, not from spending restraint. In 1993, total federal revenue was $1,154 billion, 17.8 percent of gross domestic product; 1999 estimates are $1,824 billion, 21 percent of GDP. In Denver last week, Moore said he thinks the government should reduce its revenues, rather than running a Treasury surplus. The Colorado legislature took small steps in that direction this session but only because otherwise it has to give the money back. Moore rued the absence of a national spending limit like Colorado's Taxpayer Bill of Rights, the TABOR amendment. If Congress can't agree on tax cuts, what will happen to the puppets' deals? Treasury is always paying off old notes and issuing new ones. If he has a surplus, he'll issue fewer new ones, thus gradually paying down the national debt, but slowly enough for Social Security to buy what she wants. If the economy goes very well indeed, the deficit does not return and the debt melts away, there could come a time when the debt Social Security wants to own is greater than the total Treasury wants to issue. Congress can almost certainly manage to avert this problem by spending more, but in any case it would be only temporary. Starting around 2012, when her cash flow turns negative and the Boomers begin to retire, Social Security will blow through her accumulated trillions in 20 years or so, and in the half-century following need to borrow an estimated $20 trillion more. Could Treasury sell that much debt? Probably. Safe and a little dull sounds pretty good in most of the world. But paying it off will be a burden. Instead, Uncle Sam could decide that "pay as you go" was a mistake, and use the current surpluses to cushion a switch to retirement accounts that people really do own. Then they wouldn't need puppets.