The balanced budget and Social Security:
Social Security reform could lead to higher taxes
by Simon Gajer

1. This year's budget surplus--an easy way to "Save Social Security First"?

In 1997, the US Congress and President Clinton agreed on balancing the federal budget by the year 2002. As early as 1998, the President announced the first balanced budget „since man walked on the moon“ and the largest surplus as a share of the economy in 40 years: the US Treasury is expected to get a $35-billion surplus (Economist May 30th, 1998:45).
However, the question is: What to do with the surplus? Could money (maybe) go to parts of the American welfare state? (A chart on federal welfare programs can be found in Murswieck 34).
This paper will focus on the US surplus-budget's impact on Social Security. Social Security--as part of the U.S. welfare system on the federal level--is among top priorities in Washington. Before Bill Clinton knew about this year’s surplus, he had already announced „Save Social Security first.“ And the US public is also concerned about the Social Security system. Less than 50 percent of future beneficiaries are confident the system will be able to meet its long-range commitments (Koitz and Kollmann 1998b, 1).
This paper has three main chapters. The first one gives a brief introduction to the problem of Social Security. The second shows some reform proposals. Finally, the last chapter will take a closer look at the federal budget to get an idea of the future of the Social Security.

2. The iceberg older society and Titanic Social Security: in 2032 the ship could be gone--if nothing changes

Social Security is the federal fund providing money for elderly retired people of 65 years and older. In 1996, for example, Social Security’s recipients received roughly 40 percent of their cash income from Social Security (CBO 54).
The Social Security fund is financed by taxes from both employers and employees. A federal grant to the system--as Germany has--is unknown. The taxes are not withhold for the actual tax-payer’s retirement. Social Security taxes going in the fund are immediately spent as benefits for the already-retired persons (for an introduction to Social Security see CBO 54---55; Holtfrerich 113--116; Murswieck 36).However, the future of the fund is unstable.

Social Security’s Projected Cash Surpluses and Deficits as a Percentage of GDP
(source: GAO 19)

As it can be seen in the chart, Social Security’s revenues currently exceed expenditures--and will even produce surpluses until 2012. However, the cash flow that is needed to pay benefits to legitimate retirees in the future will increase rapidly. And this is the problem.
US society is getting older: the baby-boom generation of the post-war time will retire. And an increasing life expectancy will also increase costs. The number of people of 65 years and older is supposed to rise by 75 percent by 2025. The number of workers who will pay the Social Security taxes, however, is projected to grow by only 12 percent. The result: „the ratio of workers to Social Security recipients is projected to fall from 3.4 to 1 today to 2.0 to 1 in 2030,“ (Koitz and Kollmann 1998a, 2; see also GAO 18; Rich).
If nothing changes, „insolvency for the Disability Insurance part of Social Security is projected to occur in 2019, and for the retirement and survivors part, in 2034. On a combined basis, ... [these] two parts of Social Security would become insolvent in 2032,“ (Koitz and Kollmann 1998a, 1)--and the Titanic Social Security would be gone.

(source: Koitz 3)

3. Social Security black-inked this year’s budget

To analyse impacts on Social Security by a balanced budget, it is important to see how Social Security--as a federal fund--is linked to the overall federal budget.
Among the federal funds, the Social Security fund has a special status: it is „off-budget.“ This means, revenues from Social Security taxes are separated from other taxes arriving at the Treasury and transferred to the Social Security trust fund. However, if more Social Security taxes are received than spent to Social Security recipients, the federal government can spend the surplus--and the Treasury, then, is "in debt" at the fund. If, on the other hand, the fund runs a deficit, the fund gets money back it has earlier borrowed to the Treasury. The problem is: the system of providing federal money to Social Security does only work as long as the fund has a balance with the Treasury (see GAO 28, 32; Koitz 3). And, the balance will run out by the year 2032.
Over the next years, Social Security is expected to have a surplus. What does this mean for the overall federal budget? „Social Security’s benefits alone account for more than one-fifths of federal spending, and its payroll taxes account for about one-fourth of government revenues,“ (Congressional Budget Office, cited from GAO 32). This means for this year’s budget: if Social Security’s fund is excluded the budget is not black-inked anymore (Economist, May 30th, 1998:45; on the following chart, however, the black lines refers to federal deficit).

(source: Office of Management and Budget)

4. Reform ideas for Social Security

After looking at the way the budget became balanced this year, this chapter will focus on some major proposals how "Titanic" Social Security could ship safely around the iceberg.
While looking at some proposals it could be interesting to also focus on Congressional parties and their view on this issue. Before the mid-term elections, held on November 3, 1998, both parties--White House and Democrats on one side, Republicans on the other--criticized each other for not being cooperative on the Social Security issue. However, all participants see the importance of the issue. And, both the President's party and the Republican majority of Congress put the Social-Security reform on top of 1999’s issues (Rich and Washington Post, October 25, 1998). Therefore, a reform is supposed to come (sooner or later).

What are the major proposals? Does the budget have any influence on the proposals?
The proposals can be put in two categories: privatize Social Security or improve the current federal-fund system.
There are three main proposals on the privatization-side. The reformed and privatized funds would, e.g., invest mostly in stock markets to gain greater benefits. Although, most of the proposals want also to reduce benefits to recipients over time, one proposal would grant some federal taxes to persons now 55 or younger until the system will have changed (see CBO 35; Koitz and Kollman 1998a, 8--10).
On the other side, Koitz (6) argues today’s Social Security surpluses are not enough to provide enough money to rescue Social Security--e.g., through investment in stocks. Therefore, privatization would not be a good idea, he argues. In his point of view, it is more important to lower overall government spending so taxes for Social Security could be increased--and the system could survive--while other taxes could be lowered.
When looking at the proposals, one can say no proposal has been made leading towards a discussion like the one in Germany about a "Grundrente" (a minimum pension all citizens get) provided by taxes that could be increased individually by personal savings. Only for a short time during the modification of the system, one proposal would spend money to persons now working. Therefore, it seems that no federal grants will be paid to Social Security. It will remain a system focusing on the individual contributions (Murswieck 36).

5. A tougher financial discipline is needed to save Social Security without higher taxes

After looking at the major proposals to save Social Security, it can be said all of them need a more balanced budget in one or the other way if future taxes should stay the same level as today. If Social Security would be privatized its future surpluses couldn’t black-ink anymore the federal budget.
However, as the Economist (May 30, 1998, 45) points out--besides the surplus of Social Security--luck played another important role for the surplus. Not tough financial discipline, but more tax-revenues made the budget look well. And therefore, the budget is in a shaky position, „[a] budget surplus that is reached by way of ever-rising tax receipts is not necessarily sustainable nor always a sign of good fiscal policy,“ (Economist, May, 30th, 1998, 45). Therefore, analysts argue such federal funds--especially the main-contributor Social Security--should be excluded so greater efforts had to be made balancing the budget--if tax increases are not an option (Koitz 6). This means, reforming Social Security and excluding the fund from the federal budget might lead to an increase in taxes to keep the budget balance--if economy does not grow.
Since an ever-growing economy can not be taken for granted, a tough financial discipline is important. This could be the biggest problem. Some analysts say both parties claimed to have saved Social Security by creating a budget surplus that could help finance the program in the coming years, while agreeing also on a bipartisan way to use more than a quarter of this year's surplus for spending initiatives (Dewar; a main point of criticism is a transportation bill providing $216 billion bill for highway, bridge and transit construction over six years).

6. Bibliography:
Alter, Jonathan. 1998. Washing off the red ink, if it weren’t for the budget surplus--and both parties--the future would be even cloudier. [cited Oct. 25, 1998]. Available from http://newsweek.washingtonost.com/nw-srv/printed/int/debt/wv/na0315_1.htm.
Baker, Gerard. US budget set to remain unbalanced. Financial Times, February, 27, 1997:4. Dewar, Helen. 1998. Capitol tally: one big win but many more losses. Washington Post, October 23:A16.
The Economist, May 30th, 1998. Overselling the surplus:45--46.
Holtfrerich, Carl-Ludwig. 1991. Wirtschaft USA. Strukturen, Institutionen und Prozesse. München/Wien.
Koitz, David. 1998. Social Security taxes: where do surplus taxes go and how are they used? CRS report for Congress. Library of Congress: Congressional Research Service. April 29, 1998. (file name: 94-593.pdf.)
Koitz, David and Geoffrey Kollman. Current Social Security issues. CRS report for Congress. Library of Congress: Congressional Research Service. May 21, 1998a. (file name: 96-43.pdf.)
Koitz, David and Geoffrey Kollman. The financial outlook for Social Security and Medicare. CRS report for Congress. Library of Congress: Congressional Research Service. May 7, 1998b. (file name: 95-543.pdf.)
Murswieck, Axel. 1998. Die Sozialpolitik der USA. ein Weg für die Zukunft? Aus Politik und Zeitgeschichte. 19:33--45.
Rich, Spencer. 1999. Social Security fix in peril; deal reached on Medicare home care. [cited Oct. 25, 1998]. Available from http://www.legislate.com/xp/p-daily/i-1998101501/a- 90853454/article.view
U.S. Congress. Congressional Budget Office. Long-term budgetary pressures and policy options. May 1998. [cited: CBO]. (file name: ltbudg98.pdf.)
U.S. General Accounting Office. Report to the Special Committee on Aging, U.S. Senate. Social Security Financing. Implication of Government stock investing for the trust fund, the federal budget, and the economy. April 1998. [cited: GAO] (file name: gao.cgi.)
Washington Post, October 25, 1998. Clinton Urges Congress to Use Surplus to Save Social Security:A4.