The Social Security puzzle

President clinton's state of the Union proposal for rescuing Social Security has caused a great deal of head-scratching in Washington.

"Most members of Congress are confused," says Robert Greenstein, director of the Center on Budget and Policy Priorities. So are the press and the public.

It's no wonder. The plan is complex. Mr. Greenstein and other budget experts have been meeting with members of Congress to explain the issues. Robert Reischauer, a Brookings Institution expert, has just written an eight-page explanation. Mr. Greenstein has posted a nine-page explainer on the Web.

These papers aren't light reading. But they do show the logic of the plan. It is not off the wall. Some 82 percent of the budget surplus projected over the next 15 years would contribute to national saving by paying down federal debt held by the public, purchasing stock for the Social Security trust fund, and subsidizing the retirement savings of workers through Mr. Clinton's proposed USA accounts. Taking out the USA accounts, 71 percent goes to debt reduction and Social Security equity investments, which, as an asset of Uncle Sam, are equivalent to debt reduction.

These steps bolster Social Security.

In this regard, Clinton's plan is more ambitious (or conservative) over 15 years than the plan offered by Sen. Pete Domenici (R) of New Mexico, chairman of the Senate Budget Committee. But Mr. Domenici's plan for using all surpluses of the Social Security account - payroll tax receipts minus benefits - for debt reduction would leave less money for Congress to spend or give back to taxpayers in the next five years.

By wrapping his policy of debt reduction in "the protective armor" of strengthening Social Security and Medicare, Clinton hopes to keep Congress from blowing the surplus. His plan also shifts some burden of supporting these two social programs to the government's general funds, thereby not relying entirely on payroll taxes for their support.

Finally, the plan reduces the long-term funding shortfall for Social Security and Medicare by about half. This, Mr. Reischauer argues, could make it easier for Clinton and Congress to close the entire 75-year imbalance with "fewer, smaller painful measures" - payroll tax increases or benefit cuts.

One element of confusion is widespread lack of understanding of gross federal debt and debt held by the public. Under Clinton's plan, the Social Security and Medicare trust funds would be credited in 1999 with a huge chunk of special Treasury securities equal in value to the expected reduction over 15 years in the debt held by the public. This would boost the gross debt immediately. But the debt held by the public would decline over those years.

OK, that may be puzzling.

To economists, however, the debt held by the public is the important measure of debt. This is the debt the government has sold to the private sector, including individuals, banks, pension plans, foreign investors, etc. This debt must be serviced with interest payments and repayments. It affects national savings, interest rates, and investment.

The gross debt includes debt held by the public plus debt held by various parts of the government, including the Social Security trust fund. Servicing that debt is moving funds from one government pocket to another. It doesn't affect the economy.

Right now, the Social Security fund's surplus helps finance other parts of the government. In exchange, it gets IOUs - Treasury bonds. These, plus the Clinton special 1999 securities, will have to be serviced with interest payments and eventually principal payments. It would make more explicit the promise to pay baby boomers their Social Security and Medicare benefits, a promise already implicit in the pay-as-you-go system. But the reduction in the debt held by the public under the Clinton plan would make that easier in future decades when payments are due.

Debt servicing takes about 13 percent of federal revenues now. By 2014, it would take only 2 percent; by 2018 zero percent. Social Security could pay full benefits until 2055.

*David Francis is senior economic correspondent for the Monitor.

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