Yes, it’s an election issue. That just makes it more serious. Social Security’s legislated benefits are threatened both by Republicans, who clearly would prefer that voters depend more on private savings, and by a centrist establishment that has defined benefit cuts as a standard for fiscal responsibility. Democrats try to make threats to the program a campaign issue, while the parties trade charges that Social Security has or will be “raided”.
No one has been raiding the trust funds. That doesn’t mean there is no relationship between Social Security’s financing and the federal budget. To determine which party is most likely to make Social Security more secure, you need to look at both their proposals for the program and their overall budget policies. But that’s different from saying either has raided the trust funds.
The whole idea of a “raid” depends on the idea that there is something to be stolen. It intersects with the confusion around whether the Social Security trust funds exist in the first place. A new report by the Center for Budget and Policy Priorities does an excellent job of laying out the basic facts, but leaves one crucial issue to be considered.
The report is written by Paul Van de Water, who has served as both Assistant Deputy Commissioner for Policy at the Social Security Administration and Assistant Director for Budget Analysis at the Congressional Budget Office. As he explains, any claim that the federal government has been “raiding” the trust funds begs the question of what should be done with any surpluses. Surpluses could be used to buy federal debt, or to invest in stocks and bonds. Yes, by buying federal debt the federal government “owes the money to itself.” But that reduces future federal interest obligations that would have been owed to the public. As I explained in an earlier post, it’s like using extra income now to pay off your mortgage, so your living expenses will be lower during retirement. Nobody would call that “fake” retirement planning.
If the Social Security surplus were invested in bonds or stocks, that might seem more “real” to some people. But the income from the stocks or bonds would be largely balanced out by extra interest expense on the federal bonds sold to the public instead of credited to the trust funds. Social Security would also take on substantial market risk. I and others have endorsed modest diversification of the trust funds’ portfolios, but nobody should imagine that investing the funds in Treasury instruments is a bad decision.
Using the trust funds to reduce federal debt is not “raiding” them. So what’s the argument?
Beliefs About Budget Politics
The closest thing to a real argument goes something like this: Surpluses are supposed to reduce spending in one account (interest) to make spending in another (Social Security) more affordable in the future. Critics maintain, however, that because Social Security is in the unified federal budget account, its surpluses make the federal deficit seem smaller. Because the deficit seems smaller, politicians are less responsible about the rest of the budget. As the Milwaukee Journal Sentinel summarized the argument made by the Urban Institute’s Eugene Steuerle, the Social Security surplus “helped encourage bigger spending by the rest of the government.”
Such arguments have been made at least since the late 1980s. To make it now, however, rewrites and misinterprets history. It’s Ross Perot for elites. Perot accused politicians of not caring about the deficit after a decade in which they hardly fought about anything else. Budget hysteria and self-righteousness don’t lead to agreement on deficit reduction, but it’s definitely not that politicians didn’t think the deficit was too big.
Real World Budget Politics
Let’s go through some history:
1981: President Reagan pushes through a budget-busting tax cut. This can’t be blamed on Social Security surpluses, as there aren’t any.
1982: Social Security is on the verge of running out of money. David Stockman, Howard Baker, and Bob Dole convince Reagan to adopt a deficit-reducing package. The deficit at the time was “$200 billion as far as the eye can see,” as David Stockman put it. Hardly anybody, certainly not the plan’s sponsors, said it would solve the problem. It was just the most they could get President Reagan to accept.
1983: The Social Security rescue package puts the program into surplus and, at current estimates, finances it for more than the following half century.
A period of budget misery followed. The deficit greatly constrained all other initiatives, such as tax reform of 1986 and the Medicare Catastrophic Coverage law. Consensus said the deficit was too big; but it was so big that nobody imagined it could be addressed all at once. Every deficit-reduction package worked by making the target less than an immediate balanced budget. Shrinking the target made it possible to hit the target; making it possible to hit the target meant there could be credit for doing something.
Everyone who participated must know this. But few have drawn the obvious conclusion: if the deficit was already too big anyway, and agreement on reducing it even in stages was always exceedingly hard, there is no way that making it bigger would have helped. Participants felt there was a limit to the pain they could inflict, and those limits defined the deficit-reduction packages. There was never a point when the package was “too small” because politicians thought it didn’t need to be any bigger.
Consider what happened after the Reagan administration ended. George H.W. Bush campaigned on a promise not to raise taxes. Because he cared about the deficit, he broke his promise. He also alienated his base, presided over a disappointing economy (in spite of deficit hawks’ claims) and lost re-election. Bill Clinton then proceeded to see his stimulus and job-creating agendas blocked by deficit worries. His health -care reform prospects were badly hamstrung by deficit concerns and he lost control of Congress for doing as much as he did to reduce the deficit. Why would anyone think either Bush or Clinton could have done more? Why would anyone think the Social Security surplus kept politicians from doing more? There clearly were very, very strong other reasons to do no more than they did!
In 1997, partly through good luck, the budget was finally balanced. Did the Social Security surplus then encourage budgetary irresponsibility? Not at all. President Clinton and the Democrats promoted balancing the budget without counting the surplus. That was the policy until the Republicans took office in 2001.
So, would George W. Bush have pushed for smaller tax cuts, or more spending cuts, if the Social Security funds had smaller or no surpluses? To believe that, you have to believe that the Bush administration actually cared about the amount of the deficit (or surplus). There is amazingly little evidence for that claim.
When projections showed big surpluses, the George W. Bush administration wanted to cut taxes to give “their money” back to the people. When projections worsened, it wanted to jump start the economy by giving “their money” back to the people. Its official position was that paying for the “war on terror” by raising taxes would just increase the damage done by terrorism. It chose not to work the costs of the war in Iraq into its budget projections. In 2005, the administration pushed for Social Security “reform” that would have significantly increased deficits. Vice President Cheney famously dismissed deficit worries as politically needless.
That’s the public record; here’s the private. In 2008, I did some interviewing in OMB about the budget process during the Bush years. A senior political official discussed how the budget worked one year, in a way that was confirmed by senior career staff’s descriptions of the process. He explained that they focused on, “what is appropriate, needed and fair for nonsecurity… We ended up with some increase, just below inflation, and building from that. Then you ask what is the increase on the security side, you build in that. Then there is DOD, and you can imagine there were discussions on that. There was no magic in the top line, it’s just the sum of the parts.” As staff described the process, arguments about the proper number for the deficit per se were rarely if ever made.
Why, then, would anyone believe that politicians were less responsible about the rest of the budget because of the Social Security surplus? For most of the period of large deficits, they couldn’t do anything without finding some way to make the task look smaller, not larger. The Bush 1 and Clinton administrations experienced major political pain for what they did do. The Bush 2 administration showed no sign of having cared much about deficits anyway.
Deficit hawks don’t want to recognize that other people could legitimately object to the policy consequences of program cuts or tax hikes. They believe their policy is more important than all others, so that if others cared as much about the deficit as they do, more would be done to reduce it. The argument that Social Security surpluses cause politicians to do less than they “should” allows deficit hawks to believe the problem is a policy illusion, not actual objections to deficit reduction packages. Yet if you go through the history, there is no reason to believe making the deficit look larger ever would have caused more budgetary restraint.
Does that mean overall budget policy doesn’t matter? Of course not. In the long run, the ability to pay for Social Security depends on the federal government’s fiscal capacity. That includes the amount it can raise in taxes, and how much it is obligated to spend on other programs. Faced with a choice, politicians who do more to avoid deficits, to reduce future interest payments, are making the federal government better able to pay for Social Security.
Politicians who say taxes are not evil also are making it more likely that Social Security will be paid for. If you have two groups who push through increases in federal spending on medical care; and one group (in 2003) doesn’t offset any of the costs while the other (in 2010) is scored by CBO as providing offsets that exceed the costs, it’s pretty clear which group is making it more likely that Social Security can be financed in the future and which is more responsible about the budget.
Joseph White is Director of the Center for Policy Studies at Case Western Reserve University.