Predictably, Congress is not hesitating to spend a projected federal budget surplus. Almost $9.5 billion in black ink could be on the books within a year, and almost that many spending proposals are on the record in Washington. But in the rush to spend the spare change from President Bill Clinton’s $1.73 trillion balanced budget proposal, some basic assumptions are going unquestioned. Foremost is whether the budget is truly in balance, calling into question whether a surplus can be said to exist. This arises from the practice of adding Social Security income to tax receipts when calculating the overall budget.
If there is a surplus, the next question is where will it be spent. Clinton has called for saving Social Security. Social conservatives want to save the family. Dwight Eisenhower’s interstate highways are in desperate need of repair. Proposed reforms in education, agriculture, welfare and crime call for increasing spending. Military readiness is slipping. Taxes, while still too low to pay for the government Americans demand, are probably too high. Then there are trillions of dollars of debt that could be paid off. But first, Americans must decide whether to continue counting Social Security income when calculating the budget.
The Social Security system itself is a good example of creative accounting. On one hand the system is perpetually just a few years from collapse — and has been for two decades now. Thirty years ago, Lyndon Johnson began counting Social Security funds toward the general budget. Since then, presidents and Congresses of both parties have continued to apply Social Security income to spending in other parts of the federal budget by forcing the retirement fund to borrow treasury bonds. Similarly, occasional Social Security shortfalls have been covered by general spending. This practice has in the past contributed to false security in budgets not really balanced and to deficit spending when taxes ought to have increased.
The federal retirement fund has a projected deficit of $845 billion for 1999. That gap will be paid out of general revenue for the time being, but by the time the Baby Boom generation retires in several years, the annual Social Security deficit could shatter the federal budget. Mixing general accounts and retirement funds confuses federal accounting and disguises not only serious problems but also reasonable solutions to them. Social Security funds should be counted, and dealt with, separately from the general budget. The drawback of this for politicians is that it would erase the feel-good balanced budget and a mostly mythical surplus.
Furthermore, a recession can hit with only a few months of warning. An economic downturn is at least possible by September, and could easily create a new federal deficit in excess of $100 billion. Although the U.S. economy is healthy, spending any surplus before it’s collected would be foolish. Until it’s perfectly clear there is a surplus, with unused cash in treasury accounts, conservative spending is the best bet. Nor should there be any immediate cut in taxes. Lowering taxes might feel good right now — an election year — but it could leave future generations with substantial bills to pay. Congress should heed Clinton’s call to “save Social Security first” by repudiating his budgetary sleight-of-hand.
Federal budget not truly balanced in ’99
Published February 18, 1998
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