To: Ross Perot
From: Jude Wanniski
Re: Hoarding the Surplus
There are persistent rumors that you believe Arizona Sen. John McCain is just what the doctor ordered if we are going to save the Social Security System when the baby boomers begin to retire en masse in 2012. Presumably this is because you see McCain wanting to earmark the surplus revenues now flowing into the U.S. Treasury from the SS payroll tax... and to use the surplus flowing into Treasury from the income tax to pay down the national debt. Ross, I hate to break the bad news, but if we actually did what McCain wants to do, the Social Security and Medicare accounts will be bankrupted in the year 2020. Your worst fear -- that SS taxes for employers and employees would have to be doubled in order to keep them solvent -- will be unavoidable. For that matter, the plans of the other presidential contenders in both major parties would have the same result. You cannot save Social Security by paying down debt in the years immediately ahead. You can only save Social Security by gradually building a national economy that will be able to support the boomers when they retire.
If you stop to think about it, Ross, you will realize the problem boils down to the number of workers available to support the number of retirees. Three workers now support a retiree. In 2020, there will be only two workers per retiree. Paying down the national debt will not increase the number of workers. All it would enable the government to do would be to go deeper in debt in our general fund by borrowing what we need from other countries. Either that, or we have to tax each worker's output by 50% more to pay the cost-of-living and health-care costs of our seniors. Do you see what I mean?
Normally, this kind of flaw in the national debate would have been exposed long ago. Unfortunately, once President Clinton saw he could make points by accusing the Republicans of using the "surplus" to give tax cuts to the rich -- instead of saving Social Security -- the issue was incorrectly framed. The Republicans could have said the President was mistaken, that his method of locking up the surplus for use in 20 years could not begin to solve the problem of too many retirees per worker. Only steady additions to the nation's capital stock could solve the problem painlessly -- so that each worker would have 50% more capital in 2020 than he or she has today. This is not something that we can wait to the last minute to do, Ross. You can't increase the economy's productivity by 50% all at once. It has to be done each year, a little at a time, and it realistically only can be done by lowering the risks to capital formation and increasing the rewards to successful capital formation.
Think of the debt problem we face at two levels, with two sets of books. We now have a publicly held national debt of $3.6 trillion, which has accumulated over the last half century. It sounds bigger than it is because of the inflation we've experienced in the last three decades since we went off the gold standard. In 1945, the national debt was 130% of national output and today it is only 40%. This is the debt that President Clinton vows to eliminate entirely over the next decade. The other set of books, though, shows an actuarial deficit of almost $7 trillion. That is, we know how many people there are in the national economy and how old they are and when they will retire. Even if the objective of "retiring the publicly held national debt" by 2013 were realized, the federal government's total debt by then still would be more than $1 trillion higher than it is today. In 2013, at the same time the Administration forecasts complete retirement of the current $3.6 trillion in publicly held debt, it projects total federal debt of more than $6.8 trillion, of which $4.2 trillion is due to the Social Security system. These are the holdings of the SS "trust fund," which is simply an accounting of the Treasury's obligation to restore to the retirement system the surplus payroll tax proceeds which are now being used to pay down the publicly held debt. As this unfunded liability to the retirement system is redeemed, in all likelihood it would be financed through issuance of new debt to the public. The current exercise, then, is largely a matter of paying down publicly held debt now in order to restore it -- and more -- in the future.
Clearly, none of this would make the slightest difference to sustaining the Social Security guarantee under the current payroll-tax/benefit structure. Despite appearances to the contrary, the accumulation of trust fund balances has no relationship to the system's capacity to fund future benefits. Without reforms to increase economic efficiency so that two workers can provide the per-beneficiary income stream that today is supplied by three workers, the system will become an increasing burden to taxpayers starting in the 2020s. Nevertheless, the Administration is maintaining the pretense that the trust fund build-up represents real economic assets that can be drawn upon to meet future benefit requirements. It also goes a step further, laying out in its 2001 budget submission a plan for crediting the trust funds with the interest savings resulting from the retirement of public debt. "Devoting Social Security surpluses to debt reduction will reduce interest payments from $230 billion in 1999 to zero in 2013 and will dedicate interest savings to extend Social Security solvency to 2050." The proposal, in reality, would do no such thing. It simply would expand the trust fund's accounts sufficiently to keep the fund showing positive balances beyond its currently estimated drop-dead date of 2034. Meeting benefit requirements still would require Treasury to raise the resources needed to redeem the IOUs.
Surveying the political landscape offers little promise that this delusional approach soon will be corrected. Republican congressional leaders essentially have been co-opted by the White House into accepting the objective of debt retirement as an end in itself. In the Republican presidential campaign, the surging "insurgent" John McCain has made a commitment to debt reduction synonymous with his vaunted display of character. George W. Bush has had little choice but to concede that he too would place a high priority on paying down the national debt. Among glum senior Republican staffers on Capitol Hill, there is little expectation that the debt obsession will be a passing phase for the party. "The idea," said one, "that there is an opportunity cost to paying off the debt is not even broached."