The Truth About Surpluses and Social Security

Clinton vows to veto GOP tax-cut bill, even as parties spar over how to use surplus.

The debate over Social Security is moving to political centerstage as Republicans and Democrats wrangle over whether an $80-billion GOP tax-cut bill, passed by the House this weekend, will drain funds needed to shore up the system.

The central issue is how the tax cut would impact the future solvency of the national retirement system, projected to face a steep decline in assets as more baby boomers quit work beginning in 20 years.

The parties have taken opposite sides on the issue, with Democrats charging the GOP with orchestrating a raid on Social Security and Republicans accusing Democrats of "scare tactics." Moving closer to an election-year showdown, President Clinton again vowed to veto the bill if it passes the Senate.

But would the tax cut endanger Social Security, as Democrats claim? Or would it have no impact on the financial well-being of the safety net for retirees, as the GOP alleges.

The reality, say budget experts and government officials, lies between these partisan extremes.

The tax cut - mainly for middle-income groups such as married couples, small investors, the self-employed, and farmers - would not reduce the funds flowing directly into the Social Security system, as some Democrats imply, the experts say.

Instead, it would draw down the budget surplus - the first since 1969 - which is projected to be $80 billion next year and total $1.6 trillion over the next decade.

A sort-of surplus

Yet the budget surplus itself is a kind of long-term loan from Social Security to the rest of the government. Indeed, the surplus now exists only because the Social Security system is taking in more in payroll taxes than it pays out in benefits.

In 1999, for example, Social Security is expected to have a net surplus of $117 billion, according to official projections. These accumulated yearly surpluses are invested in Treasury securities held in the Social Security Trust Fund. The government makes use of these multibillion-dollar Social Security surpluses to operate. Without them, the budget would still be running a deficit of some $40 billion in 1999.

"There really aren't surpluses which we should be distributing back to the American people as tax cuts any time in the near future," explains Robert Reischauer, former head of the Congressional Budget Office.

Without counting Social Security, "we won't experience a significant surplus until 2006," says Mr. Reischauer. By eroding the surplus, tax cuts would affect Social Security in two ways in the long term, despite GOP claims to the contrary, experts say:

First, the cuts would reduce the funds available to repay Social Security when, in about 2021, the system has to begin liquidating its Treasury assets to provide benefits for the growing ranks of baby-boomer retirees.

Social Security's future

Second, the tax relief today would leave fewer financial resources for shoring up and reforming the Social Security system as its funds are depleted. By 2032, the system will only be able to pay out three quarters of promised benefits, according to official figures.

"If you start using the surplus for tax cuts, you are limiting your options on how to address Social Security's long-term solvency," says Judy Chesser, deputy commissioner of the Social Security Administration.

Conservative economist William Niskanen agrees. "This [tax cut] undermines the prospect for general Social Security reform," says Mr. Niskanen, chairman of the Cato Institute and a former economic adviser to President Ronald Reagan.

Republicans assert that such concerns are answered by a measure, adopted by the House on Friday, that would wall off 90 percent of the projected 10-year budget surplus for Social Security and leave the remaining 10 percent for the "modest" tax cut.

"We can save Social Security and cut taxes," says House Ways and Means Committee chairman Bill Archer (R) of Texas.

Still, Democrats say it is more prudent to put off tax cuts and reserve 100 percent of the surplus - which could fall short of projections - until Congress and the administration can settle on a bipartisan plan for putting Social Security on solid footing.

A White House conference on Social Security is scheduled for December, with bipartisan negotiations in Congress on the issue expected early next year.

"We support tax cuts. We just think we should save the Social Security system first," says Rep. Charles Rangel of New York, the ranking Democrat on the House Ways and Means Committee.

Democrats have, however, proposed to use the some of the surplus for "emergency" spending on embassy security and year 2000 computer problems.

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