Surplus Rancor Much Ado About Nothing
by Sean Tuffnell
August 31, 2001
If there was ever any question why so many younger Americans tune out politics, one need not look any further than the current debate over the Social Security surplus.
According to the Congressional Budget Office the government will tap about $9 billion of the Social Security surplus this year to pay for other government spending. Those numbers were seized upon by Democrats and the national press corps to prove that our financial prospects are as bleak as the Dallas Cowboy's Superbowl chances.
The White House refutes this, saying that according to their estimates, there will still be a non-Social Security surplus of about $1 billion this year.
Listening to the back and forth, I can't help but think of a scene from Bill Murray's classic film "Meatballs." Hang with me for a second. The night before the final competition between Camp North Star and Camp Mohawk, Murray realizes he must boost the morale of his under-equipped campers. So he gives them what passes for a St. Crispin's Day speech:
"Even if God in Heaven above points His hand at our side of the field; even if every man, woman, and child joined hands together and prayed for us to win, it just wouldn't matter because all the really good-looking girls would still go out with the guys from Mohawk because they've got all the money! It just doesn't matter if we win or if we lose. IT JUST DOESN'T MATTER!"
Then everyone chants: "IT JUST DOESN'T MATTER! IT JUST DOESN'T MATTER..."
And that's the point. It just doesn't matter if the government uses the Social Security surplus for other government spending or if it uses it to pay down the debt. Either way, the money is not being saved for Social Security benefits. Either way, it doesn't change how many bonds are being attributed to the Social Security Trust Fund. Either way it doesn't affect the government's ability to pay benefits in the future. Either way, IT JUST DOESN'T MATTER!
The only reason we're having this debate is because both parties began pushing the idea of a Social Security "lock box" a couple of years ago, in an attempt to one-up each other as the guardians of Social Security. The truth is, the "lock box" idea is a sham.
Let me back up for those who are unfamiliar with how Social Security actually works. Social Security is what is called a "pay-as-you-go" pension system. The benefit checks today's retirees receive are paid for by the payroll taxes deducted from the paychecks of today's workers. That's what F.I.C.A. is for everyone looking at your pay stub.
This year the government will collect $162 billion more in payroll taxes than it needs to fully fund today's benefits. Instead of saving the extra money for future benefit payments, the government spends it. Most years it has spent it on other government programs. Recently, with the government collecting surpluses of income and other taxes, it has begun spending the extra payroll tax money to pay off government debt.
This is where the Social Security Trust Fund comes in. The trust fund is a special account the Treasury department has to keep track of how much excess payroll taxes it has collected. When the government spends the excess payroll tax money, regardless of whether it is spent on roads or debt repayment, the Treasury simply issues itself a bond to represent money it collected but no longer has.
That's why this surplus debate just doesn't matter. How the money is spent doesn't change the amount of bonds the Treasury credits to the Trust Fund.
Yet even that doesn't really matter either. The existence of the Trust Fund has absolutely nothing to do with the government's ability to pay future benefits, since the "Fund" doesn't actually have any money in it. Congress could double the Trust Fund or eliminate it all together. Either way, the government is still going to have to come up with the money for benefits once payroll taxes fail to be sufficient at current rates to do the job completely. And that date is just 15 years away.
What does matter is the way the government deals with this problem. As long as we continue to spend every penny of the surplus instead of saving it, say in personal retirement accounts, the economic consequences will be far more severe than postponing a little debt repayment. Try raising payroll tax rates by 36 percent by 2050, or slashing benefits by a fourth. Is that starting to matter?