In the early 1980s, acting on the advice of the Greenspan Commission, President Reagan and the congress began "prefunding" Social Security--having the Social Security system run a surplus in the years from 1983 to 2017 or so in order for it to run a deficit later on. Reagan, George H.W. Bush, and the congresses of the 1980s and early 1990s (and George W. Bush and his congresses of 2001-2006) used this Social Security surplus as an excuse for not dealing with their enormous general-fund deficits: taxes were lower and spending was higher than if they had lived up to their responsibilities or not had the Social Security operating surplus to draw on.
What does this history entail for future fiscal policy, both as a matter of honor and a matter of prudence? Andrew Samwick tries to think through these issues, and gives his take. He says smart things:
Vox Baby: The federal government simply put a new Treasury [bond] in the trust fund and spen[t] the Social Security surplus on things other than buying back its existing debt from the public, as if the Social Security surplus were just like any other tax revenue at its disposal.... The federal government targets the unified budget deficit, which treats the Social Security surplus in this way. In my memory... the only time in the last 25 years when we did not [focus on the unified rather than the general-fund budget deficit was... in the [late] Clinton Administration.
President Bush [focused on the unified deficit] when he pledged "to cut the deficit in half in 5 years" (see this earlier post.) His Administration is doing it again with the more recent statements about budget balance by 2012. In all cases, the deficit in question is net of the Social Security surplus, and thus the policy presumes that the Social Security surplus is available to spend on general government expenditures.
I have in an earlier post argued that the government should be targeting the on-budget deficit and have Social Security in long-term balance. Bernanke stops short of saying this. That's the first way in which his testimony was not exactly what I would have said. There are two other things that I hope he stresses in his future public statements:
First, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits but not with the debt burden placed on them by continued deficits in the General Fund. What is the rationale for running any deficit in the on-budget [general fund] account when the economy is in the up side of a business cycle?
Second, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits while at the same time enacting legislation, like Medicare Part D, that will generate even larger annual deficits to be financed by these same future generations.
Readers of this blog know that I don't exhibit these inconsistencies. I have precious few compatriots among would-be Social Security reformers on the political right.
Returning now to Dean [Baker]'s second paragraph, he regards cutting Social Security benefits as theft, asserting that "workers have already paid for these benefits." I might believe that if the Social Security surpluses were actually being saved rather than spent. But they aren't. It would be more appropriate to say that what the workers--Dean, me, you, all of us--have paid for is all of the government services that the Social Security surpluses have purchased in the past 20 years. We've already consumed them. We have no compelling justification to assert that future generations of workers, who were not party to these decisions, should have to pay higher taxes to honor promises that our generation has made to itself.
But something has to be done, and the sooner it happens, the less disruptive it will be. As always, I recommend that policy makers start here.