The Most-Needed Social Security and Budget Reforms By John Atlee, 7/2/2000

The Gore and Bush proposals don't solve the most basic problems of Social Security and budget surplus allocation.

SS REFORM.  The present SS "crisis" was caused by the SS Trustees' projections of early "bankruptcy" for the SS Trust Fund -- based on economic assumptions consistent with 6% unemployment. But their alternative "low cost" projection -- 5% unemployment economic conditions in 1996, 4 1/2% in 2000 -- was financially sound for the full 75 years.

Thus, the most basic principle for any truly credible "save SS" program is simple: the financial security of SS should not be hostage to ever-changing and unreliable economic forecasts -- or to government economic mismanagement, or diversion of its legally dedicated Baby Boom surpluses to other purposes.

Honoring this principle would actually be quite simple -- and would also facilitate better management of both the budget and the economy:

1. Take the whole SS account -- and civil service and military retirement -- completely out of the main ("unified") Federal budget (as they were before the Vietnam War), so their legally-dedicated Baby Boom surpluses are excluded from all references to "the budget surplus."
2. For their financial projections, use what the Congressional Budget Office (CBO) calls "standardized" economic and unemployment assumptions. And since we have now had several years of actual unemployment close to 4% -- the long-ignored policy target of the historic Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978" -- we should use this unique window of opportunity to make this the 4% standardized basis.
3. Transfer to the main Federal budget's fiscal balance (deficit or surplus) any economy-caused shortfall of the actual Trust Fund surplus from the 4% unemployment projection. This will consolidate this recession-mitigating "automatic stabilizer effect" where it can be more easily evaluated, and dealt with politically, rather than reducing the retirement trust funds.

Insulating SS this way will give Baby Boomers and their children much more confidence that their retirement benefits will actually be there when they retire -- and also expose basic false assumptions in other proposals.

But the 4% unemployment projection also frees up funds to reduce FICA contribution rates (especially welcome to lower income workers) and/or improve women's SS benefits (a growing political demand). Moreover, with SS out of the main federal budget, the Trust Fund could be permitted to invest its current surpluses in higher-yielding, maturity-laddered corporate bonds and securitized home mortgages.

BUDGET REFORM.  Applying the same standardized economic basis to the main Federal budget would make it much more fiscally responsible and understandable:

1. End the fiscally irresponsible and confusing "unified" budget. Federal retirement-fund saving could then be clearly recognized as a key independent part of the economy's total financial saving, along with comparable business and local government funds, rather than falsely seeming to reduce the main-budget's current deficits or increase its surpluses.
2. The SS-free main budget projections should be based on the same standardized 4% unemployment conditions as the SS projections, rather than on the present ever-changing and unreliable economic assumptions that cause so much confusing political debate.
3. The main Federal budget would then have two functionally distinct components:
1. The economically standardized, Congress-controlled, POLICY BUDGET, and
2. The economy-controlled STABILIZATION ACCOUNT (which the CBO calls the "cyclical" surplus or deficit), that could also be managed pro-actively by an economically appropriate, non-political, explicitly anti-recession tax cut, if and when needed. For projecting this account, the Federal Reserve, which largely controls the economy's growth rate and unemployment rate, could provide more credible economic assumptions than the CBO or OMB.

With an economically standardized, SS-free, POLICY BUDGET, the political issue of how to use "the projected budget surpluses" could be debated in a much more fiscally responsible and honest manner that both Congress and the public could better understand. And it could greatly improve policy coordination in these areas between Congress and the White House.

President Clinton could initiate political discussion of these reforms by presenting a version of his midyear budget in this format.

For further background and implications of these proposals, see Social Security, the Federal Budget and the Economy.