Republican budget writers say they may have found a way to cut the federal deficit even if they borrow hundreds of billions more to overhaul the Social Security system: Don't count all that new borrowing.The issue is that it does not appear that the Administration will raise new revenue to fund personal accounts that will eventually substitute for a portion of Social Security benefits as stipuated in current law. As I have discussed before, this does not mean that the reform is infeasible. But it does mean that the unified budget deficit--which includes the Social Security and Medicare surplus or deficit--will be wider over a period of decades as debt is issued to cover the personal account contributions. Eventually, the unified budget deficit and total federal debt will be smaller, as the other measures included in the reform (if it is the President's Commission's Model 2, for example) reduce future benefits by enough to restore solvency and repay the debt issued during the transition. (See Chapter 6 of the 2004 Economic Report of the President for a full discussion.)
The Washington Post article goes on to quote Senator Judd Gregg of New Hampshire, the incoming chairman of the Senate Budget Committee:
"You cannot look at Social Security in the context of a five-year budget," the window that current White House and congressional spending plans cover, Gregg said. "To do so is naive and foolish. . . . If this is simply scored as a five-year exercise, we're never going to solve the problem."I think he's right, in a political if not economic sense. We could avoid these five-year budget horizon issues if we funded, rather than borrowed, the money to contribute to the personal accounts. But even with additional funding, for a program that spans all generations of workers and beneficiaries, an alternative perspective may be a more useful guide to long-term budget policy.
I have argued that the virtue of reform is to eliminate the unfuded obligations of $10.4 trillion in the Social Security system. It would seem simple enough for the Administration to say that the goal is long-term solvency, this plan restores long-term solvency, and the additional deficits and debt are just a temporary (i.e., only a few decades) phenomenon that disappears when they are repaid out of program saving. If it's so simple, why is the Administration now contemplating accounting acrobatics to try to move its policy forward?
The answer appears in (among other places) the Fiscal Year 2005 Budget released in February. The budget target announced in the President's budget message was to "cut the budget deficit in half in five years." The budget deficit here is the unified budget deficit--which includes the Social Security surplus--and that's the rub. Look at Table S-12 in the Summary Tables of the budget to see why. That table shows:
The "cutting in half" is taking the $521 billion down to $237 billion. However, this reduction in the unified deficit involves a reduction of only $174 billion in the on-budget deficit, combined with an increase of $109 billion in the off-budget surplus. When the Administration announced its budget target, it fully incorporated not just the level of the off-budget surplus, but the projected growth in that surplus over the five-year period. (To me, this qualifies as "spending the Social Security surplus," but that's a topic for a later post.) The Administration did not announce, "we can cut the on-budget surplus by a quarter" (i.e., 174/675). That would not have appeared to be an aggressive enough position to take on fiscal discipline.
The Administration is relying on the Social Security surplus (and its growth) to reach its near-term budget target, but it does not want to acknowledge the impact of personal accounts on that unified budget deficit. Had it stated its budget target in terms of the on-budget deficit--to cut it by a quarter over five years--then it would have a much freer hand now in putting the reform of Social Security off-budget. Doing that would be an example of an "alternative perspective" that would be a reasonable guide for long-term budget policy. What is not reasonable is to shift between two budget perspectives in order to make stated targets easier to achieve.