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CRS Report Finds Clinton Plan Reserves Only 57 Percent of Surplus for Social Security

FEB. 24, 1999

CRS Report Finds Clinton Plan Reserves Only 57 Percent of Surplus for Social Security

DATED FEB. 24, 1999
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Index Terms
    legislation, tax
    budget, federal
    payroll tax
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-8744 (18 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 43-17

 Memorandum                         February 24, 1999

 

 

 SUBJECT: President Clinton's Social Security Reform Proposal

 

 FROM:    David Koitz

 

          Specialist in Social Legislation

 

          Domestic Social Policy Division

 

 

[1] This memorandum was prepared in response to requests from Members of Congress for a critique of President Clinton's Social Security reform proposal. Since an Administration draft bill has not been transmitted to the Congress, the following analysis is based on the President's State of the Union address on January 19, 1999, the President's FY 2000 Budget documents released on February 1, 1999, public statements made by White House officials, various Administration briefing documents provided to Congress, and memoranda and other data prepared by the Office of the Actuary of the Social Security Administration (SSA).

DESCRIPTION OF PROPOSAL

[2] This plan, proposed by President Clinton in his January 19, 1999 State of the Union address and included in his FY 2000 Budget as a "framework" for Social Security reform, would require annual general fund infusions to the Social Security trust funds equal to approximately 57% of the unified budget surpluses projected to arise over the next 15 years under current law (for reasons described later, note that this figure differs from the 62% figure cited in Administration documents and press accounts about the proposal). Under the President's budget projections, these infusions would amount to about $2.8 trillion cumulatively over the period. As described by SSA's deputy chief actuary in two memoranda (January 26 and February 12, 1999), the amount to be credited to the trust funds would be based largely on current estimates of the unified budget surpluses, not on the actual surpluses that may arise over the 15- year period. According to the actuary, approximately 79% of the infusions would be invested in SPECIAL ISSUE non-marketable federal securities similar to those now credited to the trust funds, and the remaining 21% would be used to buy equities for the trust funds. The President further proposed elimination of the Social Security earnings test and unspecified measures to reduce poverty among elderly women.

[3] Under the intermediate assumptions of the 1998 Social Security Trustees' Report, the trust funds are projected to be depleted in 2032 under current law. The SSA actuaries project that the President's proposal would defer that depletion date until 2055, and eliminate about 2/3rds of the system's average 75-year deficit. The President proposed no other changes to deal with the system's long-range deficit, however, he said he would work with Congress to develop additional measures to resolve the entire problem.

[4] The President also proposed that about $.5 trillion of the budget surpluses be used to create Universal Savings Accounts (USAs) -- new 401(k)-like accounts that individuals would control. Under the measure, the Treasury would contribute a "base" amount annually to the accounts of all workers eligible to have a USA, supplemented by workers' own contributions and a government matching amount. The Administration envisions the government matching amount being scaled to income -- the lower one's income, the larger the percentage match -- with possibly a phase-out of the match at some higher income level. These accounts would be intended to provide retirement income to supplement Social Security benefits. However, they would not take effect until action is completed on resolving Social Security's long- range financing problems. Administration representatives have stated that it is their desire to work with the congressional authorizing committees to develop how exactly the USAs would work.

[5] The following table using figures contained in the President's budget documents shows how the Social Security measure and the creation of the USAs fit within the overall use of the projected budget surpluses that the President proposes.

 _____________________________________________________________________

 

               TABLE 1. PRESIDENT CLINTON'S PROPOSED USE

 

                     OF PROJECTED BUDGET SURPLUSES

 

 _____________________________________________________________________

 

 

 Use of Unified             Proposed Amount

 

 Budget                     Allocated to             Percent of Total

 

 Surplus                    Each Use                     Surpluses

 

 _____________________________________________________________________

 

 

                         (Cumulative, FY 2000-2014,

 

                              $s in billions)

 

 

 Social Security                 $2,764                      57%

 

 

 Medicare                           686                      14%

 

 

 Universal Savings Accounts         536                      11%

 

 

 Military readiness and other       481                      10%

 

 critical national needs

 

 

 Sub-total of uses before        $4,467                      92%

 

 interest costs

 

 

 Interest costs (from not           387                       8%

 

 otherwise reducing publicly-

 

 held federal debt)*

 

 

 Total projected surpluses       $4,854                     100%

 

 _____________________________________________________________________

 

 

 Source: President's FY 2000 Budget documents.

 

 

                          FOOTNOTE TO TABLE 1

 

 

      /*/ The portion of the projected $4.854 trillion cumulative

 

 surpluses that would be used for reduction of publicly-held federal

 

 debt is assumed in the budget to be $2.5 trillion, or 52% of the

 

 total.  If the entire amount were used to reduce publicly-held

 

 federal debt, the net interest costs (interest paid to the public) of

 

 the government would be lower.

 

END OF FOOTNOTE TO TABLE 1

 

 

______________________________________________________________________

[6] The President's budget documents and other White House briefing materials state that the share of the budget surpluses earmarked for Social Security reform is 62%. However, the actual dollar figures shown in the FY 2000 Budget represent 57% of the surpluses. The "62%" figure comes from ignoring the portion of the surpluses that would have to be used to pay higher interest costs arising from the President's budget proposals (the $387 billion shown in Table 1). The Administration computes the percentage going to Social Security after subtracting these interest costs from the total projected surplus of $4.9 trillion.

ANALYSIS

[7] The main element of the President's Social Security reform proposal is the general fund infusion to the Social Security trust funds that would occur over the next 15 years.

What Is a General Fund Infusion?

[8] It is simply an exchange of credits among government accounts -- a promise from one account to pay another. There is a common perception that the infusion the President proposes is a "double counting" of Social Security receipts that would otherwise be credited to the trust funds since much of the projected unified budget surpluses under current law can be attributed to excess Social Security taxes. However, the Administration has not represented the infusion as having anything to do with current or future Social Security receipts. It simply proposes crediting the Social Security trust funds with $2.8 trillion over the next 15 years. The amount of the credit, most of which would take the form of so-called special issue non-marketable federal securities -- the same type as are now credited to the trust funds -- would not be contingent on any other form of Social Security trust fund receipts; it would be an exchange of credits from the government's General Fund to the trust funds. The following table shows the SSA actuaries' estimates of the credits.

 _____________________________________________________________________

 

         TABLE 2. ESTIMATED NEW AMOUNTS TO BE CREDITED TO THE

 

                 SOCIAL SECURITY TRUST FUNDS UNDER THE

 

                    PRESIDENT'S PROPOSAL, 2000-2014

 

 _____________________________________________________________________

 

                    (Fiscal years, $s in billions)

 

 

 Year        Amount       Year        Amount       Year        Amount

 

 _____________________________________________________________________

 

 

 2000         $81.5       2005        $117.7       2010        $256.5

 

 2001         $67.5       2006        $148.9       2011        $280.1

 

 2002         $88.5       2007        $175.1       2012        $299.9

 

 2003         $87.4       2008        $203.4       2013        $316.5

 

 2004        $106.0       2009        $232.6       2014        $324.5

 

 _____________________________________________________________________

 

 

[9] Source: Memorandum from Stephen C. Goss, Deputy Chief Actuary, and Alice H. Wade to Harry C. Ballantyne, Chief Actuary. Long-Range OASDI Effects of the President's Proposal Jor Strengthening Social Security -- Information, February 12, 1999. Office of the Actuary, SSA. _____________________________________________________________________

How Would the General Fund Infusion Be Determined?

[10] The amount of the credits also -- according to the actuaries' description of the plan -- would NOT be contingent on budget surpluses actually materializing. It would be largely PRE- DETERMINED at the time of enactment and would become a mandatory "payment" or credit that the Treasury would have to give to the trust funds for the next 15 years. In a technical sense, the credits would be an "entitlement" made annually to the Social Security trust funds. As described by the actuaries, the amounts shown in Table 2 -- representing overall about 57% of the budget surpluses projected in the President's FY 2000 budget for the years 2000 through 2014 -- would be converted into percentages of taxable payroll based on today's projections of taxable payroll, and THESE PERCENTAGES would BE PUT IN THE LAW FOR THOSE YEARS. Subsequent to enactment, an estimate of taxable payroll would be made annually and the general fund infusion for each such year would be calculated by multiplying the applicable percentage stated in the law by the then-current estimate of taxable payroll.

[11] In effect, whether there would be any budget surplus in the 15-year period would be irrelevant to how much is credited to the trust funds. The only thing that would cause the annual infusions to differ from those projected today would be future estimates of taxable payroll. In the aggregate, something relatively close to $2.8 trillion would be credited to the trust funds over the period, whatever the fiscal condition of the government turned out to be.

ECONOMIC IMPACT

What Does It Mean To Give $2.8 Trillion Of Unified Budget Surpluses To Social Security?

[12] Under the proposal, 79% of the $2.8 trillion, or about $2.2 trillion, would be in the form of new SPECIAL ISSUE federal securities, and 21 % or close to $.6 trillion, would be in the form of stocks purchased in the financial markets. The crediting of $2.2 trillion in SPECIAL ISSUE securities to the trust funds has no economic impact in and of itself Since it is an exchange of credits among government accounts -- i.e., an internal transaction of the government -- it does not change governmental receipts, spending, or borrowing, and it does not put more "money" into the Social Security trust funds or the nation's financial markets. This crediting of federal securities creates an "obligation" for the government to the trust funds, but does not create an asset for the government itself. The buying up of $.6 trillion in stocks for the trust funds has a sort of "wash" effect on the financial markets -- with one hand the government would be buying up stocks, but with the other it would be keeping the publicly-held federal debt higher than it would otherwise be because it did not use that money to buy down the debt.

[13] The President, however, proposes to link the liquidation or buying up of publicly-held federal debt to the provision of new SPECIAL ISSUES to the trust funds. The theory is that buying up publicly-held debt would increase funds in the financial markets for investments (as holders of government securities re-invest the proceeds they receive from the government). This, in turn, would be expected to lead to lower interest rates and greater economic growth than if the money were spent by the government or turned into tax cuts that largely raise "personal consumption." The buying up of $.6 trillion in stocks would have a similar effect (i.e., avoiding the use of budget surpluses largely for personal consumption). Although various types of government spending and tax cuts might be considered investments (as opposed to consumption), Federal Reserve Board chairman Alan Greenspan and a number of other prominent economists state that they believe THE MOST EFFECTIVE APPROACH the federal government could take to augment savings in the economy would be to reduce the portion of the federal debt held by the public.

How Would The President's Proposal Work?

[14] How exactly the President's proposal would work and what economic difference it would make is uncertain. Simply stating, as a matter of principle, that $2.8 trillion in budget surpluses should be used to build up the Social Security trust funds does not determine how budget surpluses will be used, especially if the underlying proposal is designed to credit the trust funds with general fund infusions regardless of whether budget surpluses actually arise.

[15] The surplus tax receipts that make up budget surpluses, assuming they materialize, would flow into the Treasury whether they are credited to Social Security or not. Under current law, the Treasury would then use these surplus receipts to pay off holders of Treasury bills, notes, and bonds as they mature, and if the surpluses were large, they might even have to buy up federal securities traded in the financial markets. In this regard, it should be understood that the President's proposal would use less of the overall unified budget surpluses to reduce the debt held by the public than would occur NATURALLY under current law. In the aggregate the President's plan -- under his budget projections -- would use about HALF of the surpluses to buy up the debt.

[16] However, in recognition that current taxing and spending laws can be altered, Administration officials have described their measure as creating a sort of "lock" on budget surpluses, the idea being that "linking the reduction of the publicly-held debt to shoring up the Social Security trust funds" will foreclose using at least 57% of the budget surpluses for tax cuts or other spending increases.

[17] It may be that the Administration's intent is to pursue enactment of legislation that would say in some form or another that 57% of unified budget surpluses must be used to buy up publicly-held federal debt and stocks for the trust funds. For instance, the language might contain a new "point of order," perhaps to be incorporated as part of the Budget Enforcement Act, permitting a floor objection to be raised against measures that would violate this rule. If so, the "strength" of the President's proposal would emanate from the potential "moral obligation" and/or political obstacle the rule creates for using 57% of future budget surpluses for something other than buying up publicly-held federal debt and stocks for the trust funds.

[18] Even then, however, such legislative language would not necessarily bind future Congresses. If such an "objection" were enacted and subsequently raised against some future tax reduction or spending proposal, it could be waived or the law permitting the point of order could be changed, Simply stated, legislation enacted in the 106th Congress cannot stop some future Congress from passing alternative legislation. If an alternative future use of the budget surpluses (calling for tax reductions or spending increases) were accompanied by assurances that the Social Security trust funds would still receive the "credits" they were supposed to receive, the political hurdle against using that portion of the budget surpluses for something other than debt reduction could be removed.

[19] Thus, from an economic perspective, at least one fundamental question the President's proposal begs is whether ANY PROPOSAL can effectively hinder future policymakers from using future budget surpluses for something other than debt reduction.

Trust Fund Impact

How Is The Social Security System's Financial Condition Assessed?

[20] Traditionally, the financial condition of the Social Security trust funds is measured (projected) over a 75-year period into the future. While any such future forecasts are highly uncertain, Congress and the Administration have found long-range projections a necessary tool in attempting to set Social Security policy. The basic reasoning is that a national retirement program, by definition, has long-range goals and needs to be assessed on a long- range basis. Hence, since the inception of the program, Congress has called upon the program's trustees to make long-range projections with the assistance of professional actuaries.

[21] Although there have been exceptions, generally the trustees make three sets of projections to show a range of possible outcomes and to recognize the considerable uncertainties involved in their forecasts. One is labeled a "low-cost" scenario reflecting economic and demographic assumptions considered to be relatively favorable to the system's financial condition. A second is labeled a "high cost" scenario reflecting relatively unfavorable assumptions. A third is labeled an "intermediate" or, as it is sometimes referred to, "best guess" scenario, with assumptions falling between those of the low- and high-cost scenarios. In examining the program's condition and in making changes to it, past Administrations and Congresses have typically used the trustees' intermediate projections as a baseline for assessment and comparison.

[22] The actuaries also make their estimates in "percent of taxable payroll" terms. Taxable payroll is a measure of the total earnings in the economy subject to Social Security taxation. They make estimates this way because future projections expressed in dollar amounts can be misleading given that they reflect inflation and wage growth assumptions compounded over many years -- the numbers can get so large, they become incomprehensible. It also gives a sense for how much of the nation's current and future payrolls must be earmarked for Social Security since the system is largely financed by payroll taxes.

What Do The Latest Social Security Projections Show?

[23] Under the intermediate assumptions of the trustees' 1998 report, the balances of the trust funds are projected to grow from nearly $.8 trillion today to a peak of $3.8 trillion in 2020. After that, the trust funds' income would be less than their outgo and the balances of the funds would fall until they were totally depleted in 2032. Projected receipts would cover only 73% of the outgo in 2032, falling to 68% in 2070.

[24] Today, the cost of the system -- estimated to be nearly $400 billion in 1999 -- is equal to 11.1% of taxable payroll. It is projected to rise slowly over the next 12 years, reaching 12.2% of payroll by 2010. It would then begin a more precipitous rise to 16.7% in 2025 and 18.2% in 2035. This would be near the end of the baby boomers' retirement as those born in 1965 (the approximate end of the baby boom) would be 70 years old in 2035. After that, the system's cost would rise slowly to 19.8% of payroll in 2075.

[25] On average over the entire 75-year period the system's outgo would equal 15.6% of taxable payroll and its income would equal 13.4% of taxable payroll. The difference, or average long-range deficit, is shown to be 2.19% of taxable payroll. Comparing the two figures, average outgo would exceed average income by 16% (15.6/13.= 16%). Although there are other rules of thumb used to measure financial soundness, generally the system is thought to be out of "close actuarial balance" if its average income is less than 95% of its average outgo. Typically, when this occurs, the trustees recommend that corrective measures be enacted. Notably, the gap between income and outgo grows throughout the period and by 2075, income would equal 13.4% of payroll, outgo would equal 19.8% of payroll, and the gap would equal 6.4% of payroll. Simply put, by the end of the projection period, outgo would exceed income by 48%.

How Would The President's Proposal Alter The System's Projected Condition?

[26] The SSA actuaries project that the President's proposal would extend the year of trust fund depletion from 2032 to 2055. With $2.8 trillion in general fund infusions over the next 15 years building on top of the $2.9 trillion that would otherwise be added to the trust funds over the next 21 years (under current law), the trust funds' balances are projected to grow to a peak of $14.9 trillion in 2037. After that, the trust funds' income would be less than their outgo and their balances would fall until the funds were totally depleted in 2055.

[27] AVERAGE 75-YEAR IMPACT. The actuaries project that the President's proposal would reduce the system's average 75-year deficit from 2.19% of payroll to 0.75% of payroll. In other words, it would eliminate nearly 2/3rds of the average deficit. Most of the improvement comes from the $2.8 trillion general fund infusion; a smaller portion comes from the investment of 21% of that infusion in stocks. The proposal would make only minor changes in Social Security benefits, so there would be no noticeable effect on the system's average expenditures.

 _____________________________________________________________________

 

            TABLE 3. AVERAGE 75-YEAR IMPACT OF PRESIDENT'S

 

                    SOCIAL SECURITY REFORM PROPOSAL

 

 _____________________________________________________________________

 

                                Current Law       President's Proposal

 

 

                                  (Expressed as % of taxable payroll)

 

 

 Average trust fund income          13.45                14.89

 

 Average trust fund outgo           15.64                15.64

 

 Average deficit                     2.19                 0.75

 

 _____________________________________________________________________

 

 

 Source: Derived from SSA actuaries' February 12, 1999 memorandum.

 

 _____________________________________________________________________

 

 

[28] The actuaries assume that SPECIAL ISSUE non-marketable federal securities would continue to comprise the bulk of the trust funds' holdings. The stock component is assumed to rise gradually to 14.6% of the trust funds' holdings in 2014 and thereafter remain at that percentage. In contrast to the investment return on the SPECIAL ISSUE securities, which are estimated to earn 6.3% annually (2.8% after adjusting for inflation), the stock holdings are projected to earn 10.25% annually (6.75% after adjusting for inflation). The actuaries state that the latter assumption represents "approximately the average (geometric mean) yield on stocks so far this century" including dividends and capital growth, less .25 percentage points for assumed administrative expenses. In conjunction with this, they assume that "stock investments would be managed by several brokerage firms, selected by competitive bid. Stock investments would be required to reflect the composition of all publicly traded stock in the United States (for example, the composition of the Wilshire 5000 index)."

[29] Table 4 shows the average long-range impact of the two main components of the President's plan.

 _____________________________________________________________________

 

                               TABLE 4.

 

         HOW THE TWO COMPONENTS OF PRESIDENT'S SOCIAL SECURITY

 

     REFORM PROPOSAL ALTER THE AVERAGE 75-YEAR DEFICIT PROJECTION

 

 _____________________________________________________________________

 

 

                       Deficit as                      Year that

 

                       % of taxable                    trust funds

 

                       payroll              % of       would be

 

                       (75-year average)    deficit    depleted

 

 _____________________________________________________________________

 

 

 Deficit projected under    -2.19%           100%         2032

 

 current law

 

 

 Impact of President's

 

 proposal:

 

 

   General fund infusion,    0.98             45%         2049

 

   without stock investment

 

   provision

 

 

   With stock investment     0.46             21%         2055

 

   of 21% of the infusion

 

 

 Deficit remaining after    -0.75%            34%         2055

 

 President's proposal

 

 _____________________________________________________________________

 

 

 Source: Derived from SSA actuaries' February 12, 1999 memorandum.

 

 _____________________________________________________________________

 

 

[30] IMPACT IN "PRESENT VALUE" TERMS. Another way of observing the effect of the President's plan is shown by its potential impact on the system's unfunded liability. In the case of Social Security, an unfunded liability represents the amount that has been promised to future recipients under the law, but which cannot be paid for under the system's projected income stream. The SSA actuaries measure the unfunded liability in present value terms, meaning they estimate the amount of money that if deposited immediately into the Social Security trust funds and allowed to earn interest would eliminate the long-term deficit. Their most recent estimate of this amount, based on the assumptions underlying the 1998 trustees' report, is $2.9 trillion. This is the current law unfunded liability estimate. It should not be confused with an often cited $8 trillion figure, which is based on an assumption that people under the age of 15 as of January 1, 1998 would not participate in the system. Such an assumption does not reflect current law.

[31] The President's proposal would infuse $2.8 trillion into the trust funds. Because the infusion would be made gradually over 15 years, its value expressed in present value terms is somewhat smaller -- $ __ trillion. Simply put, in present value terms, the President's proposal would eliminate __% of the projected 75-year deficit ($__ trillion/$2.9 trillion = __%). [MISSING ESTIMATES HAVE BEEN REQUESTED FROM THE OFFICE OF THE ACTUARY, SSA]

[32] Looked at another way, the President's proposal would accomplish the same result if it called for an immediate "lump sum" infusion of $ __ trillion.

[33] IMPACT ON THE "ULTIMATE" COST OF THE SYSTEM. The use of "average" 75-year or aggregate "present value" impacts provides a simplified gauge of the long-range situation and the effect of the President's proposal. However, used in isolation, they have the potential to "mask" the extent of the system's ultimate long-range financial needs or demands. For instance, under current law, the average 75-year deficit is 2.19% of taxable payroll -- representing a funding shortfall of 16%. However, in 2075, the approximate end of the valuation period, the difference between projected income and outgo is 6.43% of payroll. Simply stated, outgo would exceed income by 48%.

[34] While the President's proposal is projected to reduce the average deficit from 2.19% to .75% of payroll, the gap between income and outgo in 2075 is unaffected, remaining at 6.43% of payroll. See the following table.

 _____________________________________________________________________

 

                TABLE 5. PROJECTED 75-YEAR AVERAGE AND

 

              ULTIMATE IMPACTS OF THE PRESIDENT'S SOCIAL

 

          SECURITY PROPOSAL ON THE SYSTEM'S INCOME AND OUTGO

 

 _____________________________________________________________________

 

 

 Year              Current Law                 President's Proposal

 

 ___       _____________________________     _________________________

 

           Income      Cost      Deficit     Income     Cost   Deficit

 

 

                       (in % of taxable payroll)

 

 _____________________________________________________________________

 

 

 75-year    13.45     15.64       -2.19       14.89    15.64     -0.75

 

 average

 

 

 2060       13.29     19.04       -5.75       13.29    19.04     -5.75

 

 

 2070       13.34     19.54       -6.00       13.34    19.54     -6.00

 

 

 2075       13.36     19.79       -6.43       13.36    19.79     -6.43

 

 _____________________________________________________________________

 

 

 Source: SSA actuaries' February 12, 1999 memorandum and 1998 OASDI

 

 trustees' report.

 

 _____________________________________________________________________

 

 

[35] The President recognized in his State of the Union address that his proposal would not eliminate the long-range deficit, and he stated his desire to work with Congress to reach a bi-partisan agreement on resolving the entire problem.

Fiscal or Budget Impact

How Does Social Security Affect The Financial Flows Of The Government?

[36] Social Security receipts from the public -- consisting of payroll taxes and income taxes levied on Social Security benefits -- now exceed Social Security expenditures. Although this favorable situation is projected to continue through 2020, the point at which Social Security receipts from the public (ignoring interest credited to the funds) would fall below the system's outgo is 2013. Since interest "paid" to the trust funds is simply an exchange of credits among governmental accounts, it does not represent a source of receipts for the government. Only the portion of the trust funds' income represented by taxes provides receipts for the government.

[37] Thus, it is in 2013, not 2020, that surplus Social Security taxes would no longer be available to the government and other resources of the government would be needed to help meet the system's costs. At that point, IN THE ABSENCE OF SURPLUS RECEIPTS FOR THE REST OF THE GOVERNMENT'S OPERATIONS, policymakers would have three basic choices: raise taxes, cut spending, or borrow money from the public.

[38] Since the trust funds would still be credited with interest for the securities they hold, from an accounting standpoint their "total" income (tax receipts and interest combined) would exceed their outgo and the use of general governmental resources during the 2013-2020 period would be "making good" on part of the interest due to the funds. Even more general governmental resources would be needed in the 2020-2032 period as the balances of the trust funds are drawn down.

How Would The President's Proposal Alter The Financial Flows Of The Government?

[39] As previously described, the general fund infusion contemplated in the President's proposal would augment the income recorded to the trust funds, but it would not, in and of itself, change the income and outgo of the government. Thus, although trust fund income would be projected to exceed trust fund outgo until 2037 (instead of 2020), the point at which Social Security receipts from the public fall below the system's expenditures would not change. It would remain 2013.

[40] However, requiring that a portion of the general fund infusion be invested in stock -- 21% of the infusion or $.6 trillion -- would require the government to make outlays to purchase the stock. Thus, during the first 15 years -- the period over which the stock would be acquired -- governmental expenditures would be higher than under current law, with a corresponding reduction in the amount of the projected unified budget surpluses that would otherwise go towards reduction of the publicly-held federal debt. Under current law, all of the surpluses automatically would go toward debt reduction. Governmental interest expenditures also would be higher (by nearly $.3 trillion cumulatively) because the debt would be higher.

[41] At a later point -- 2017 -- the opposite condition would arise. The system would be drawing down the portion of the trust funds that is in stock to help pay benefits, and this would cause a favorable impact on the financial flows of the government (even recognizing higher interest costs occurring at that point). The sale of the stock would bring receipts into the government that would not otherwise arise. However, this favorable effect would last only until 2032. In 2032, receipts from the stock liquidation would be more than offset by higher benefit outlays because the overall increase in the size of the trust funds would forestall cuts in benefits that would otherwise take place. In other words, with the exception of the stock portion of the trust funds' holding, the general fund infusion in the first 15 years would raise the balances of the trust funds without raising governmental receipts, and these higher balances would lead eventually to higher expenditures. These higher expenditures would occur in the period from 2032 to 2055 -- basically, the period over which the President's proposal would extend the "life" of the trust funds (See Table 6 on the following page).

[42] An alternative perspective is that the amount of benefits required to be paid under the benefit computation rules in current law would somehow be met in full even though the trust funds would be depleted in 2032 and incoming Social Security receipts would be sufficient to finance only 73% of them. It certainly is hard to say what exactly the Secretary of the Treasury as managing trustee of the trust funds would do in 2032 if the trust funds' balances fell to zero. Nothing in the Social Security Act gives the Secretary guidance. However, the conventional view is that the Secretary would have to delay the benefits until sufficient revenues were collected or cut the size of the monthly checks. This perspective is reflected in the President's comments in his State of the Union address ("By 2032, the trust funds will be exhausted and Social Security will be unable to pay the full benefits older Americans have been promised") and routinely of late in the annual reports of the Social Security trustees.

[43] Thus, if this is the correct legal perspective of "current law," any outlays permitted over and above those that can be financed with incoming receipts would be considered "new spending."

[44] The following table shows the projected impact of the President's proposals on the receipts and expenditures of the government relative to current law, including the potential interest effects of having a higher amount of publicly-held federal debt during the period from 2000 to 2015 (see footnote at the end of Table 6 below).

 ______________________________________________________________________

 

       TABLE 6. PROJECTED IMPACT OF THE PRESIDENT'S PROPOSALS ON

 

         THE GOVERNMENT'S RECEIPTS AND EXPENDITURES, 2005-2050

 

 ______________________________________________________________________

 

 

                                  Impact on

 

                Impact on        governmental

 

               governmental      expenditures,     Deficit (-) or

 

                 receipts     including interest surplus (+) effect

 

               ____________   __________________ __________________

 

 

                               ($s in billions)

 

 

 2005                none            +33                -33

 

 2010                none            +81                -81

 

 2015                 +45            +53                 -8

 

 2020 /*/             +79             --                +79

 

 2030 /*/            +166             --               +166

 

 2040 /*/            +237         +1,147               -911

 

 2050 /*/            +308         +1,832             -1,524

 

 ______________________________________________________________________

 

 

 Source: Calculated by CRS based on estimates contained in SSA

 

 actuaries' February 12, 1999 memorandum.

 

 

                          FOOTNOTE TO TABLE 6

 

 

      /*/ Figures for 2005 to 2015 include increased interest costs to

 

 the government of having a higher amount of publicly-held federal

 

 debt. Figures for 2020 to 2050 reflect no interest impact (negative

 

 or positive) because of the possibility that publicly-held federal

 

 debt would be eliminated by then and uncertainty about subsequent

 

 fiscal policy with respect to potential budget surpluses and deficits

 

 arising during this period. No figures are shown after 2050 because

 

 the trust funds are projected to be depleted in 2055 under the

 

 President's proposal.

 

END OF FOOTNOTE TO TABLE 6

 

 

______________________________________________________________________

Where Would Money Come From To Make Good On The Trust Funds' Balances When Social Security Expenditures Exceed Social Security Receipts?

[45] The Administration says that projected unified budget surpluses would be ample to finance the additional budgetary demands of paying Social Security benefits in full long into the future. In other words, the higher costs of the system resulting from the President's proposal would not impose a strain on other government programs and would not require further tax increases or new public borrowing for possibly most if not all of the next half century.

[46] THE CONVENTIONAL VIEW OF LONG-RANGE ENTITLEMENT STRAINS. For the past decade or two, the general view held by budget experts and many economists has been that regardless of the projected condition of the Social Security trust funds, if the rising future costs of entitlement programs were to be met in full, they would significantly strain the financial condition of the government. The belief has been that the "true" strain on government is shown not by trust fund income and outgo figures, but by a large and sustained projected rise in the cost of entitlement programs driven by demographic conditions -- the advent of the baby boomers' retirement and ongoing improvements in life expectancy that increase the number of elderly people relative to the working-age population. The perception is that entitlements will "crowd out" spending on everything else the federal government does or require an oppressive tax burden.

[47] Since the great depression of the 1930s, the aggregate level of federal taxes has only occasionally exceeded 19% of GDP. Typically, as the tax burden approached or exceeded this level, federal taxes have been legislatively reduced in one way or another or economic conditions changed such that it fell again. Even at the height of World War II, aggregate receipts only reached 20.9% of GDP. In FY 1998, they stood at 20.5%, the highest level since the War. While the cost of government spiked up during the War, reaching a peak of 43.7% of GDP in 1944, in the past 55 years it has pretty consistently remained in the range of 18% to 22%.

[48] Social Security, Medicare and Medicaid -- the three largest federal entitlements -- with expenditures of 8% of GDP now account for somewhat less than half of all federal spending. While the Administration and CBO differ considerably, generally their forecasts show the costs of these programs rising to 15% of GDP in 2030 and eventually to 17% to 20% in 2060 and 2070. Hence, the question these projections raise is how the government would finance the rest of what it does if the aggregate tax burden were to be held to 19% or so.

[49] The 1994/95 Bipartisan Commission on Entitlement and Tax Reform projected the overall cost of government rising to 38% of GDP in 2030, 10% of which would consist of interest on the debt. Aggregate entitlement expenditures would have risen from 11% to 21%, and the overall budget deficit would have been nearly 19%. As recently as the February 1997 Economic Report of the President, the President's Council of Economic Advisors expressed concern that their then-projected 19% cost of Social Security, Medicare and Medicaid in 2050 "could crowd out virtually all other government spending," and eventually exceed all of the government's projected revenues. Their report stated that "Most long-term budget projections based on current policy show the deficit mounting to around 20% of GDP by 2050, while the debt held by the public reaches a level between two and three times GDP."

[50] THE ADMINISTRATION'S LATEST PROJECTIONS -- SUGGESTING A NEW PERSPECTIVE. The latest Administration (Office of Management and Budget -- OMB) projections challenge this long-range perspective. They show a very different forecast; one that suggests that demographic conditions may not be the "burden" pre-supposed, and that their strain on government finances may not be all that inevitable.

[51] The Administration's "current services" projections show large unified budget surpluses would exist long into the future that could be used to cover the future "draw down" of the Social Security trust funds. In fact, these budget surpluses would be so large and long-lasting that they could conceivably cover balances of the trust funds through 2050. Perhaps more significant is that the OMB projections suggest the overall cost of government will be lower over the next half century than it was through much of the past 25 years.

 ______________________________________________________________________

 

                TABLE 7. OMB AND CBO LONG-RANGE UNIFIED

 

                          BUDGET PROJECTIONS

 

 ______________________________________________________________________

 

                          (Fiscal years, % of GDP)

 

 

           1998    2010    2020    2030    2040    2050    2060    2070

 

           ____    ____    ____    ____    ____    ____    ____    ____

 

 

 Total

 

 federal

 

 receipts:

 

 

   CBO     20.5    21      21      21      21      21      21      --

 

   OMB     20.5    20.1    20.6    20.9    21.2    21.4    21.5    21.6

 

 

 Total

 

 federal

 

 spending:

 

 

   CBO     21      18      20      22      24      27      35      --

 

   OMB     21      17.1    17.6    19      19.6    20.3    22      24.9

 

 

 Total

 

 surplus or

 

 deficit (-):

 

 

   CBO      1        3      1      -1       -3      -6    -14      --

 

   OMB      1        3.1    2.9   1.9       1.6    1.1    -0.5     -3.3

 

 ______________________________________________________________________

 

 

 Source: Figures represent OMB and CBO current law projections;

 

 derived from CBO's Economic and Budget Outlook, FYs 2000-2009

 

 (January 1999) and the President's Budget for FY 2000, Analytical

 

 Perspectives (February 1999). Note that CBO uses somewhat different

 

 measures and categorization of government spending than OMB.

 

 ______________________________________________________________________

 

 

[52] A critical part of the revised OMB forecast is based on the prospect of eliminating publicly-held debt at some point between 2010 and 2015, as well as the interest on it, which stood at nearly 3% of GDP in 1998. In addition, it assumes that after the publicly- held federal debt is eliminated, budget surpluses would be used to acquire income-generating "assets" for the government that eventually would hold down or "offset" government expenditures by nearly 2% of GDP. A third major element assumes a downward trend in discretionary spending (as a percent of GDP) that has existed since 1970 would continue indefinitely, dropping the relative magnitude of discretionary spending nearly in half by 2040 (from 7.6% in 1995 to 3.9%).

[53] Receipts also are assumed to rise as a percent of GDP -- from 18.8% of GDP in 1995 to 21.2% in 2040 -- in part reflecting long-term income tax "bracket creep" (incomes rising at a faster rate than inflation means more of it becomes taxable at higher tax rates).

[54] Thus, while OMB shows spending for Social Security and other entitlements rising from 10.2% of GDP in 1995 to 17.5% in 2040 (and 18.5% in 2050), nearly every other major component of the budget changes in a "positive" way. The largest improvement is in interest on the publicly-held debt. As the following TABLE 8 shows, it swings from a 3.2% of GDP cost in 1995 to a 1.9% "income producer" in 2040 and 2050.

 ______________________________________________________________________

 

               TABLE 8. OMB PROJECTED CHANGES IN UNIFIED

 

                     FEDERAL BUDGET, 1995 TO 2030

 

 ______________________________________________________________________

 

 

 Component of budget       FY 1995       FY 2040       Difference

 

 ___________________       _______       _______       __________

 

 

                               Component of budget as % of GDP

 

                           ______________________________________

 

 

 Receipts                   18.8           21.2          +2.4

 

 Discretionary Spending      7.6            3.9          -3.7

 

 Entitlements Spending      10.2           17.5          +7.3

 

 Interest on debt            3.2           -1.9          -5.1

 

 Total Spending             21.1           19.6          -1.5

 

 Surplus (+)/Deficit (-)    -2.3           +1.6          +3.9

 

 ______________________________________________________________________

 

 

 Source: Figures derived from the President's Budget for FY 2000,

 

 Analytical Perspectives (February 1999).

 

 ______________________________________________________________________

 

 

[55] CBO's LONG-RANGE BUDGET PROJECTIONS. In the medium-term outlook (i.e. through 2030 or so), CBO's budget projections also provide a much improved image of the government's financial condition. Even though overall federal spending would be somewhat higher than under OMB's projections, CBO's spending projections differ little from the general levels that have prevailed over the past 25 years, and its overall projections show budget surpluses for most of the next 30 years.

[56] Where CBO's projections differ markedly from OMB's is in the long range. For 2060, OMB projects the overall cost of government to be 22% of GDP, whereas CBO projects it to be 35% (See the following TABLE 9). Notably, the major difference is not in entitlement spending -- CBO projects entitlement spending to be 21% of GDP; OMB projects it to be 20%. The major difference is in the impact of interest. CBO projects federal interest costs reaching 11% of GDP in 2060 whereas OMB is showing the government RECEIVING interest income of 1.5% of GDP. The main reason for the difference stems from the earlier re-emergence of budget deficits in CBO's projections. As reflected in the following table, CBO's forecast shows somewhat higher and faster growing overall costs of government than OMB even during the 2010 to 2030 period. As a result, its projected budget surpluses erode faster than under OMB's forecast, and deficits re-emerge sooner. CBO has them re-emerging sometime between 2020 and 2030; OMB shows them re-emerging sometime between 2050 and 2060. Consequently, the debt held by the public grows through much of the latter half of CBO's long-range forecast, leading eventually to very large interest costs.

 ______________________________________________________________________

 

                    TABLE 9. OMB AND CBO LONG-RANGE

 

                    PROJECTIONS OF FEDERAL SPENDING

 

 ______________________________________________________________________

 

 

          (Fiscal Years, Total Federal Spending as % of GDP)

 

 

         2010    2020    2030    2040    2050    2060    2070    2075

 

 ______________________________________________________________________

 

 

 OMB     17.1    17.6    19.0    19.6    20.3    22.0    24.9    26.8

 

 CBO     18      20      22      24      27      35      none    none

 

 ______________________________________________________________________

 

 

 Source: Figures represent OMB and CBO current law projections;

 

 derived from CBO's Economic and Budget Outlook, FYs 2000-2009 and the

 

 President's Budget for FY 2000, Analytical Perspectives. Note that

 

 CBO uses somewhat different measures and categorization of government

 

 spending than OMB.

 

 ______________________________________________________________________

 

 

[57] UNCERTAINTIES OF THESE PROJECTIONS. Both OMB and CBO caution about the use of their projections. CBO gives particular emphasis to how sensitive they are to changes in the outlook for the first 10 years. Since long-range projections are built off of a "base" period, if the base period improves significantly, it can greatly affect the long-range picture by "compounding" a growth rate off of a higher initial amount. The opposite can happen if the base period deteriorates. The fact that CBO's near-term budget outlook has changed so radically over the past two years (from showing cumulative deficits or $2.1 trillion in January 1997 to showing cumulative surpluses of $2.7 trillion just two years later) gives some sense for the volatility and uncertainty of the long-range outlook.

 ______________________________________________________________________

 

     TABLE 10. CBO'S 10-YEAR FORECASTS OF UNIFIED BUDGET DEFICITS

 

                  AND SURPLUSES, 1997, 1998, AND 1999

 

 ______________________________________________________________________

 

 

                                        Cumulative Deficits (-) or

 

                                       Surpluses (+) for current and

 

 Year Projection Made                    subsequent 10-year period

 

 ____________________                  _____________________________

 

 

                                              ($s in billions)

 

 1997: Forecast for FY 1997-2007                 -$2,136

 

 1998: Forecast for FY 1998-2008                    +655

 

 1999: Forecast for FY 1999-2009                  +2,672

 

 ______________________________________________________________________

 

 

 Source: CBO's Economic and Budget Outlook, January, 1997, 1998, and

 

 1999.

 

 ______________________________________________________________________

 

 

[58] OMB notes the uncertainty of a variety of its assumptions. One involves the projected decline in discretionary spending. Although following a downward trend established in 1970, OMB's long- range projections assume the relative magnitude of discretionary spending eventually will be reduced by more than half, dropping from 7.6% of GDP in 1995 to 3.6% in 2060. That decline alone would offset nearly half of the rise in entitlement spending.

[59] Also significant is OMB's assumption that after the publicly-held debt is eliminated in or about the 2010-2015 period, the government would use continuing budget surpluses to buy income- producing "assets." How the government would do this and what it would buy is uncertain. More important is the question of whether such "authority" even exists. Buying up income-producing "assets" implies buying up stocks and bonds and other financial instruments traded in the nation's financial markets. It might be a useful analytical tool to attempt to estimate what such a fiscal policy would mean, but the magnitude of the income stream and the policy's economic implications make it a "questionable" representation of current law.

[60] Making this assumption has a major impact on the long- range projections because it shows the federal government earning "interest" on private assets approaching 2% of GDP for decades. The potential magnitude of these assets is illustrated by the fact that the government's own debt to the public today -- of $3.7 trillion -- carries an estimated interest expense of 2.6% of GDP in FY 1999. A basic question these projections raise is whether it is reasonable to assume that the government would really accumulate assets of this magnitude once its own debts have been paid off.

[61] Most important, however, is that the President's own fiscal policy is not reflected in these "current services" projections. Under his FY 2000 budget plan, only half of the budget surpluses projected for the next 15 years would go toward reduction of publicly-held debt. However, the more than 50 years of budget surpluses shown in the Administration's "current services" forecast are premised on all of the next 15 years' and subsequent surpluses going toward debt reduction and later "asset accumulation." The amount of the declining interest costs and the subsequent "interest income" would be greatly eroded by an assumption that debt reduction in the next 15 years would be half as large as shown under the "current service" projections. And this, in turn, could significantly move up the point at which budget deficits re-emerge.

[62] IMPLICATIONS OF THESE LATEST PROJECTIONS. If OMB's and CBO's long-range budget projections do nothing more, they show how sensitive the long-range outlook is to assumptions about long-term federal debt. If they are accepted at face value, they suggest that the rising costs of entitlements at least during the medium term future -- the period of the baby boomers' retirement -- need not necessarily create an untenable burden on the future financing of the government; they might impose no burden at all.

[63] Nonetheless, interest costs and non-entitlement government spending are large, uncertain factors in assessing the overall costs of government over the long term. Assuming discretionary spending will decline as a percent of GDP will not make it happen. Discretionary programs are by definition changeable, year-by-year. Recessions, military conflict, and other unforeseen roles for the government may appear far more important at some future time than maintaining an ever-decreasing pattern for discretionary spending. And while debt reduction has economic and budgetary merits, and is a priority today, it inevitably will be weighed against concerns about whether federal taxes are too high. Today, aggregate federal taxation as a percent of GDP stands at its highest level since World War II, and under both CBO's and OMB's projections it remains or grows from this level.

[64] What has changed little in OMB's and CBO's projections is the prospect that significant increases in Social Security and other entitlement spending are looming. Preparing for them through federal debt reduction and constraints on discretionary spending offer potential means to mitigate the financial strains entitlement programs could impose. However, perhaps equally meaningful would be taking steps to constrain the potential growth of Social Security and other entitlements directly.

FUNDAMENTAL CHOICES PRESENTED BY PRESIDENT'S PROPOSAL

[65] The President's proposal raises a number of fundamental questions about how to reform Social Security and to plan for retirement income in the future.

[66] At a minimum, it represents one side in the debate about the size of government and its future role in the provision of retirement income. By not altering the system's basic benefit provisions, it assumes the government's role in providing a basic "floor of protection" for retirement, death, and disability should be as now defined in current law. More specifically, as the nation grows wealthier, the government-afforded "floor" should rise, since the relative level of future Social Security benefits is scheduled to rise to a considerable degree with the real growth in wages in the economy. The proposal premises this on the belief that although Social Security's share of GDP will grow from 4.6% today to 7% in 2030, the government can cover the rise. On the one hand, it represents the view that if the economy is going to be so much bigger in the future, society can afford a more costly Social Security system. On the other hand, if the economy were to be as large as projected, it raises the question of whether it is necessary for the government's role to be sustained through time -- can a wealthier society take on more personal responsibility for its retirement income? This fundamental question requires a judgement call about what is an "appropriate" floor of protection.

[67] The President's plan also requires reliance on economic conditions that generate long-lasting budget surpluses. The current system relies foremost on taxes on wages -- and wages are earned even when the economy is weak and the budget is in deficit, If the future costs of the system, above those covered by payroll taxation, were to be financed with budget surpluses, it requires faith in budget projections, considerable discipline in constraining other spending, and a commitment to debt reduction far into the future. This begs the question of how exactly future policymakers would be "bound."

[68] The proposal further assumes acceptance, at least to some significant degree, of government ownership of private assets. The federal government has never acquired private financial assets to meet its commitments to the extent provided for under the President's plan. It calls for estimated stock acquisitions of up to 4% of the total value of publicly-traded stocks, and these stocks would be managed by a government or quasi-government board. On the one hand, it would give the Social Security system an opportunity to increase its long-term yield on investments -- and collectively give its recipients a chance to share in the nation's growing wealth by keeping the system on a "sounder" financial footing. On the other hand, since the government would become one of the larger owners of many of the nation's businesses, the proposal raises serious questions of whether, and to what extent, decisions made in the course of business should be influenced by federal policymakers, and if not, whether an effective means can be devised to insulate businesses from such influences.

[69] By proposing the creation of universal savings accounts the proposal also commits the government to helping finance a nearly universal system of personal savings. This too represents a unique role for the government and could boost national savings. However, as with the Social Security "rescue" portion of the President's plan, it too relies on sustaining economic conditions that generate budget surpluses long into the future, since the proposal calls for them to be financed by such. If not conditioned on "actual" budget surpluses, this element of the plan could set a potentially costly new "entitlement" program in place. Once funded, the expectation for continuance of the new accounts would be great. In addition, there is the question of how the new accounts, building on top of Social Security benefits that are expected to grow in real value, will affect a declining future ratio of workers to recipients. If retirees are made considerably better off by these accounts, they may have a disincentive to continue working. Simply stated, they may find earlier retirement more affordable. This would work against the potential future strains of having fewer producers in society per retiree.

[70] The President's plan also raises the question about the most efficient and effective means of increasing national savings. It relies on federal debt reduction and attempts to enforce it as a policy by linking it to Social Security's survival. But it still has the government collecting excess taxes that future policymakers could employ otherwise. Some have suggested that the economy could benefit as well or better if more of projected budget surpluses were allocated directly to individual savings accounts than the President proposes. In this way, it is argued, future policymakers could less directly influence (alter) how future surpluses are used; the stake of individual taxpayers would be more direct.

[71] However, if more of the surpluses were used this way, there may be a propensity for people to reduce the amount of savings they would otherwise do -- since the government would be "saving" for them. Whether the reduction in other savings would be large depends heavily on the proposal itself. If much of the earmarked budget surpluses went individually to people who lack the resources or propensity to save, the reduction could be expected to be small, assuming these people did not borrow more given their perceived new wealth. If the proposal were voluntary or otherwise directed toward people who already save, the reduction in other savings could be considerable. It also would be affected by how people view their future retirement income in the aggregate, which involves consideration of their Social Security as well as their private assets. Beginning in the year 2000, people 25 and older will be told annually about the potential value of their Social Security benefits. Said another way, whatever the size of Social Security or the balances in individual savings accounts, how much people feel that they have to save to achieve given retirement goals will ultimately determine how much reduction in other savings takes place.

[72] In either case -- federal debt reduction as the President proposes or through larger individual savings accounts as others suggest -- money would flow into the nation's financial markets and potentially raise national savings and investment. Some question the potential administrative costs of doing this through individual accounts, arguing that it would be less efficient than if done collectively through debt reduction. However, administrative costs would be incurred somewhere in the economic system whether the government buys down the debt with those debt holders re-investing the proceeds or if the government invests the money directly through individual accounts. Judging which is the most efficient means is not simple.

[73] Finally, the idea of using general revenues to finance the system also raises fundamental issues, ones that date back to the system's inception. For more than 60 years, the system has relied on payroll taxes paid by employees and employers. The idea was to instill the notion that workers earned rights to the system and, thereby, would not have to rely on the benevolence of government when they retire. General fund financing implies a different principle. The President's general fund infusion would be temporary in nature, especially when viewed over a 75-year horizon. However, an estimated 22% of the system's income (other than interest) for the next 15 years would come from it, and as such it would represent the largest departure ever made from the system's traditional means of financing. Justifications for making the infusion can be found in the social elements already embedded in the system -- in its "tilted" benefit formula that favors low wage earners and by the fact that most recipients in the past have gotten far more in benefits than their own taxes were worth. But moving toward general fund financing could lead to further social elements; for example, means testing. It could do so by causing Social Security to compete for other government resources and, thereby, raise the question of why "general resources" of the government should go to well-off recipients. Means-testing involves measuring a person's income and assets in determining how much in benefits they will receive -- the more income and assets they have, the less their benefits will be. And this, it is argued, eventually could erode support for the system as those who would lose benefits because of means testing question the value of their Social Security "contributions."

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Index Terms
    legislation, tax
    budget, federal
    payroll tax
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-8744 (18 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 43-17
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