Clinton's SS Reform Plan
Source Dave Anderson
Date 99/05/01/22:47

/* Written 9:38 AM Feb 5, 1999 by in igc:labr.all */
/* ---------- "Clinton's SS Reform Plan: The Emper" ---------- */
Date: Fri, 5 Feb 1999 08:11:42 -0700 (MST)

Jerome Levy Economics Institute

Policy Notes


The Emperor Has No Clothes:
President Clinton's Proposed
Social Security Reform

L. Randall Wray

If you were to write yourself IOUs to provide for your retirement and put
them in a safety deposit box,
would you rest comfortably, assured that you would be able to purchase all
the necessities of life in
2020? Well, President Clinton's plan is even worse.

In his State of the Union Address, President Clinton offered his proposal
for "saving" Social Security by
"committing" 60 percent of projected government budget surpluses for the
next 15 years to that purpose. This
was widely, and wildly, hailed as the right thing to do. But does it make
any sense?

The president's plan relies critically on several unexamined assumptions.
Most obviously, it relies on budget
surpluses far into the future. The plan would "transfer" more than $2.7
trillion from projected general budget
surpluses to the Social Security Trust Fund over the next 15 years. The
president's unbounded optimism allowed
him to claim, "We are on a course for budget surpluses for the next 25
years," but our nation has never—let me
repeat, never—run budget surpluses for such a period. Indeed, every time we
had significant surpluses, the
economy quickly collapsed into a depression that created budget deficits.
Our federal government will not run
surpluses for the next 25 years or the next 15 years. But if simply wishing
for something can make it so, why not
project surpluses for the next 1,000 years that would total billions of
quadrillions and use a measly 5 percent of
that to solve the Social Security problem?

Close examination of the president's projections (as presented by the
Office of Management and Budget)
reveals that the federal government will continue to run a significant
"on-budget" deficit through 2003, with
"off-budget" revenues accounting for all the projected surpluses. These
off-budget revenues come entirely from
Social Security taxes. According to projections of the Social Security
Trustees, payroll tax revenues will exceed
Old-Age and Survivors Insurance and Disability Insurance (OASDI)
expenditures by $119 billion in 2003, with the
surplus rising to $159 billion in 2008. Looking at the two projections
together shows that the president's
projected surplus of $150 billion in 2003 will be achieved mainly thanks to
the $119 billion surplus run by Social
Security. In other words, 60 percent of federal budget surpluses—created
for the most part by Social Security`is
being counted toward saving Social Security!

However, the real question remains: Will setting aside any surpluses
realized during the next several years really
help ease the budgetary burden of the baby boomers' retirement? To answer
this question, one must understand
that when OASDI runs a surplus, the Treasury creates an interest-earning
IOU, a nontradable bond, that is held
by the Social Security Trust Fund. This IOU is essentially a debt the
government owes itself. Because the overall
federal budget (including off-budget revenues) is projected to run
surpluses in the coming years, the Treasury will
actually retire some outstanding bonds held by the public each year, with
the amount retired being somewhat
less than the projected surpluses (hence President Clinton's claim that the
outstanding publicly held stock of
government debt will fall). Curiously, the gross federal debt will actually
rise by nearly $600 billion by 2003 in
spite of projected surpluses because the Treasury will have to create debt
to be held by OASDI. Thus, while it is
true that the public will hold fewer bonds, the government will become
increasingly indebted—to itself.

Even if the federal government could maintain a balanced budget forever,
the Treasury would have to go into
debt by another $2.3 trillion by 2020 as it issues bonds to be held by the
Trust Fund; according to the Social
Security Trustees' more optimistic assumptions, the Treasury would have to
create $51 trillion in new bonds to
be held by OASDI between today and 2075. Remember, this is debt that will
be created so that the government
can owe itself. President Clinton's plan would increase the government's
indebtedness (to itself) by another $2.7
trillion because the Treasury would issue debt equal to 60 percent of the
government's surpluses to be added to
the Trust Fund's accumulation of bonds. The greater the surpluses, the more
indebted the Treasury becomes! To
complicate the already Byzantine nature of these finances, the Treasury
pays compound interest on all this debt
by issuing more IOUs to the Trust Fund—the higher the interest rate, the
more the government owes itself and,
hence, the sounder Social Security becomes. If you can follow the
accounting logic of all this, the Clinton
administration may have a position for you.

Will this debt—whether it is "set aside" or not—help to provide for
retiring baby boomers? If you were to write
yourself IOUs to provide for your retirement and put them in a safety
deposit box, would you rest comfortably,
assured that you would be able to purchase all the necessities of life in
2020? Of course not. But isn't that what
President Clinton's plan amounts to? No—actually his plan is even worse.

What if a pension fund approached you with a retirement plan according to
which you were to pay a safety
deposit box fee equal to 2 percent of your annual income so that you could
safeguard your own IOUs to be taken
out of the box in 2020 and sold in order to raise the cash required to
support you in your old age? You would
rightly argue that if sales of your own IOUs can really support you in your
old age, you would prefer to write them
in 2020 rather than paying the 2 percent annual fee; that would at least
allow you to consume, or to save, the 2
percent in the meantime.

President Clinton's plan consists of taxing current workers about 2 percent
more than is needed to cover all
OASDI expenditures, writing IOUs that are stored at the Treasury, and then
taking out the IOUs in 2020 and
turning them back over to the Treasury, which will then have to raise cash
by issuing bonds or increasing
taxes—exactly what would have to be done regardless of the existence of the
Trust Fund. Unless retirees can
eat Treasury bonds, the president's plan will have done nothing to provide
for them.

Milton Friedman recently made a similar argument. He pointed out that
paying taxes today to build up a trust fund
cannot help provide for future retirees. Indeed, a trust fund is little
more than an accounting gimmick.

Taxes paid by today's workers are used to pay today's retirees. If
money is left over, it finances other
Government spending—though, to maintain the insurance fiction, paper
entries are created in a
"trust fund" that is simultaneously an asset and a liability of the
Government. When the benefits that
are due exceed the proceeds from payroll taxes, as they will in the
not very distant future, the
difference will have to be financed by raising taxes, borrowing,
creating money or reducing other
Government spending. And that is true no matter how large the "trust
fund." (Milton Friedman, "Social
Security Chimeras," New York Times, January 11, 1999, A17)

To be fair, there is nothing necessarily wrong with planning to use
borrowing or additional taxes in 2020 to care
for retiring baby boomers. Indeed, there is no alternative. But why doesn't
the president simply state that that is
his plan? It makes no sense to tax current workers more than is needed to
cover current expenditures simply to
allow the government to increase its debt to itself to maintain the
subterfuge that this somehow will allow it to
avoid doing what it must do in 2020. Current workers could enjoy a tax cut
now, and this would have no impact
whatsoever on what must be done in 2020 to provide for retirees.

The current notion behind the operation of OASDI is to accumulate financial
assets now, in the belief that these
can be depleted in later years when Social Security program expenditures
exceed the revenues that will be
generated from a shrinking taxable base. In other words, the "saving"
represented by the annual surpluses will
be accumulated over the next 20 years in order to provide for future
"consumption" by retiring baby boomers.
Clearly, the retirees will not be able to "consume" the Trust Fund (which
will consist solely of bonds backed by
the full faith and credit of the U.S. government). They will need a "real"
basket of consumer goods when they
retire. The question is this: Can the current generation, as a whole, save
in real terms for its future retirement?

If the current generation were to abstain from consumption, dig holes, and
bury goods and services to be
excavated and consumed 20 years hence, we could clearly provide for future
consumption by saving (in real
terms) today. Presumably, the pharaohs had something like this in mind when
they buried goods, as well as
those who would provide services, with them in the pyramids. However,
today, outside of the stockpiles of a
handful of "survivalists," this sort of real saving is not significant.
That is, most of the consumption that occurs in,
say, 2020 will have to be provided for by production in that year, with the
notable exception of owner-occupied
housing. In other words, the Social Security Trust Fund (and all other
public and private pension funds) are
"saving" only in financial terms, in the hope that retirees will be able to
purchase real goods and services at the
time they retire for consumption at that date.

Is it possible for society to do anything today to increase the quantity of
goods and services that can and will be
produced in 2020 for consumption not only by retirees but also by all
nonretirees (working or not working)? If not,
the financial savings represented by the Social Security Trust Fund (and
all the other public and private pension
savings) can affect only the distribution of goods and services produced in
2020. The current debate, then,
seems to center around a fear that if we do not "reform" Social Security,
the retiring baby boomers will not get a
sufficient share of society's output in 2020 or some later year.

If this is really what the debate is all about, the president's proposal
does no good. His reform aims to increase
the size of the Trust Fund and its rate of growth over the future (by
"investing" a portion of it in the stock market to
obtain higher returns than those expected from its government bonds),
thereby postponing the "day of
reckoning" by 55 years, according to his calculations. However, unless
accumulation of the Trust Fund actually
enhances society's ability to produce goods and services in the year 2020,
the amount to be distributed will be
exactly the same whether the Trust Fund is larger or smaller. The only
economic justification for an accumulation
of assets is the belief that it will increase the distribution going to
retirees. However, there is no way to guarantee
that the accumulation of assets in the Trust Fund will actually bring about
this result, and it is not clear that a
larger fund will result in a more desirable distribution.

Is there a better and more direct way to ensure that the distribution will
be shifted toward retiring baby boomers?
Yes—through the tax system. In the year 2020, if it is decided that the
elderly should get a larger share of the
distribution, then payroll taxes would be increased (reducing disposable
income of workers and thus their
consumption), allowing benefit payments to the elderly to rise.(According
to the Social Security Trustees' current
intermediate projections, the payroll tax rate will have to be increased by
2.26 percent—1.13 percent each on
employers and employees—in 2020 to generate enough revenue to cover OASDI

In conclusion, it would be far more straightforward simply to increase the
tax on workers in the year 2020 and
increase the benefits paid to retirees at that time than to try to
accumulate financial reserves over the next 21
years in the hope that the OASDI Trustees could affect distribution by
turning bonds back to the Treasury, which
would then sell bonds in the year 2020 to raise the cash it would turn over
to OASDI. This could work smoothly
only if those who obtained income from working in the year 2020 decided to
reduce consumption in the year
2020 in order to buy bonds. It is possible, perhaps likely, that the asset
sales would merely depress asset prices
and that the competition for consumption by workers and retirees would
drive up prices of goods and services.
While it is conceivable that the net result would be a greater distribution
going to the elderly, that is not a
foregone conclusion. Why not simply use the tax system in the year 2020 or
2030 or 2075 to guarantee the
desired result?

The burden of providing real goods and services to retirees in 2020, 2030,
or 2075 will be borne by workers in
those years regardless of the tax imposed today. And if the amount to be
produced cannot be increased by
actions taken today, then the burden that will be borne cannot be reduced
by anything we do today. Nothing the
president has proposed will reduce the burden placed on workers in the year
2020. The president has merely
asked workers today to make a sacrifice by paying unnecessarily high taxes
without in any way shifting the
burden from future workers. This is pain without gain and is bad public


Clinton, William J. Transcript: State of the Union Address, January 19,

Office of Management and Budget. FY 1999 Mid-Session Review. 1998.

Social Security Administration. 1998 Annual Report of the Board of Trustees
of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds. 1998.

Related Publications

For additional Levy Institute research on this subject, see:

David Alan Aschauer, How Should the Surpluses Be Spent? Policy Note 1998/2

Walter M. Cadette, Safeguarding Social Security, Public Policy Brief No.
34, 1997

S Jay Levy, The Economics of Aging, Public Policy Brief No. 18, 1995

Dimitri B. Papadimitriou and L. Randall Wray, What to Do with the Surplus:
Fiscal Policy and the Coming Recession, Policy Note 1998/6

Copyright © 1999 by The Jerome Levy Economics Institute.

[View the list]

InternetBoard v1.0
Copyright (c) 1998, Joongpil Cho