Senate Budget Committee Chairman Kent Conrad (D-ND), in commenting on the current federal budget debate, observed that, "the real test for this Congress is whether or not we're going to face up to our long-term challenges." The Chairman is absolutely right in directing the country to examine the long-term impact of its policy makers' budget decisions. Before we can be prepared to deal with our long-term domestic challenges, however, we must correctly identify just what these challenges are.

Senate Budget Committee Chairman Kent Conrad (D-ND), in commenting on the current federal budget debate, observed that, "the real test for this Congress is whether or not we're going to face up to our long-term challenges." The Chairman is absolutely right in directing the country to examine the long-term impact of its policy makers' budget decisions. Before we can be prepared to deal with our long-term domestic challenges, however, we must correctly identify just what these challenges are.

To listen to the news reports and our elected leaders' soundbytes, one would have little reason to think that our long-term problems extend beyond Osama bin Laden and Saddam Hussein on the international front and the impending Baby Boomer-led Social Security "crisis" on the domestic front. Indeed, our domestic policy makers are at this time engaged in a struggle to lob at one another accusations of "destroying" Social Security, while working quickly to illustrate why their own plan will "save" it. This seems to be pretty much par for the course of policy debate these days.

But there is a substantial catch to this current debate – neither side is doing nearly as much as it says it is to "save" Social Security … and neither is doing quite so much to ruin it. Saving, or, for that matter, bankrupting, Social Security has little to do with how we spend its massive surpluses over the next 15 years. The reason, put most simply, is that those surpluses are so large that the government cannot let them idle, while it waits for more of the country to retire and begin drawing on this social insurance policy.

Social Security is designed to be a self-funded system, i.e., we pay in now for those who are retired, just as the next generation of workers will be paying in for us when we have retired. When more money is coming in than being paid out in benefits, as the case has been since a 1983 Social Security tax increase, a surplus develops in the "Social Security trust fund." This exceptionally large sum of money in the Social Security Trust Fund (by 2025, Social Security’s assets will total $3.7 trillion, as measured in 2002 dollars) cannot remain idle in the fund, but must instead be used in some way. By using the extra monies to buy U.S. Treasury bonds, the Social Security fund “lends” money to the general fund of the federal budget, and the federal government guarantees that it will pay back the money when the bonds expire – in the meantime, the Social Security trust fund earns interest on its money. When we talk about "saving Social Security," we do not mean keeping these surplus funds from being used for other needs – that is simply not an economically feasible or sound option. Thus, when we talk about Social Security’s problems, we are not referring to Congressional members "using up" Social Security surpluses, but rather to the shortfalls in Social Security revenues anticipated to surface when the Baby Boomers begin to retire, and there is less money coming in than is needed to pay beneficiaries.

As the recently issued 2002 Annual Social Security Trustees' Report explains, between now and 2041, Social Security will be taking in more than enough money from current workers (as well as the money owed it by the general fund for the government bonds it owns) to pay for all retirees' promised benefits. Beginning in 2041, however, it will be taking in enough from payroll taxes alone to pay 73% of promised benefits – the federal government’s "general fund" (made up of revenue generated by individual and corporate income taxes) would be needed to help Social Security make up the remaining difference. It should be noted, however, that the severity of these problems remains a point of contention, and some analysts, such as Center for Economic and Policy Research Co-Directors Mark Weisbrot and Dean Baker, make a credible argument that even conservative calculations used to estimate the future of Social Security indicate complete soundness up through the year 2041, and relatively few problems for another 40 years past that point (see table below). Indeed, the projected shortfalls could be easily remedied through any of a number of modifications – including increasing the current payroll tax by 2 percentage points (split evenly between worker and employer) or increasing the cutoff point on salaries eligible for the tax. Policy adjustments to Social Security – and not locking these surplus funds away – are the key to "saving" Social Security. The question of how surplus Social Security revenue should be used still remains.

(Assumes Retirement at Normal Age)
Source: Social Security Trustees Report 2002, Table VI.E11 and author's calculations, based on chart and calculations from Social Security Trustees Report 2000 in "Social Security Myth #2184 – There Won’t Be Anything Left for Me,", Dean Baker, CEPR, February 20, 2001.

Current rhetoric insists that the best use is for reducing the national debt, and Democrats have surfaced as some of the strongest proponents of continuing this practice, arguing that it will free-up funds in the future that can be used to make up the Social Security funding shortfall. Recent Republican proposals that the country needs more and more tax cuts for the wealthy and large corporations have resulted in the use of some of the Social Security surplus. Again, not only do these proposals have little positive impact on resolving the projected Social Security funding shortfall, but they also limit the opportunity to invest in the country’s future well-being, strengthen its physical, educational, and medical infrastructures and provide more opportunities for a better life for more Americans.

Especially now, given the current situations on our domestic, international, social and economic fronts, we must rethink our current strategies and decide whether it is better to:

1. Reserve all Social Security surplus funds for debt reduction. The current philosophy is to use the money the general fund earns from sale of the Treasury bonds to pay off some of our national debt. Directing the funds toward paying down debt reduces our current debt, and thus minimizes our interest payments on that debt. (Interest payments on the national debt, at 11% of FY 2001 total federal government spending, represent a considerable amount of mandatory payments.) By lowering our mandatory interest payments made each year, we make available more money in the "general revenue" fund to be used to make up the difference in whatever monies are needed to help pay for Social Security benefits after its own fund’s surplus begins to disappear. When the proposal to use excess Social Security funds for debt reduction was introduced in 1996, it brought with it the added bonus for Democrats of being a means of preventing tax cuts proposed by Republicans. Since then, this strategy has been held to too doggedly by Democrats, and is now serving to limit spending on important domestic programs, as evidenced by the current FY 2003 budget resolution debate in Congress.
   
   
2. Use the Social Security surplus funds to meet pressing domestic needs. If we use as much of the Social Security surplus as is required to pay for desperately needed social programs, Social Security's assets will be in the very same situation as they are in scenario (1) above. In 35 years, when that borrowed Social Security money is needed, we'll again use general revenues to payback the difference. Since we won’t have paid off quite as much debt as we would have under scenario (1), we'll have larger interest payments to make, but this should be weighed against what we would have accomplished in the meantime:
   
   
   • We would have avoided many of the deleterious effects brought about by ignoring domestic needs (these needs will only grow greater over the next 30 years, as infrastructure further deteriorates, health care needs expand, and a changing economy leaves more behind – and, in addition, the costs of addressing these needs will also have increased.)
     
     
   • With more workers entering the job market, better educated and better trained, there will be more money flowing into both Social Security and general revenue. Though Social Security may very well still need assistance from the Treasury – and will still be owed the money it lent the general fund – the increased number of workers paying into the system should help ease the immediacy of the post-2038 funding shortfall.
   
   
   
3. Use excess Social Security funds to pay for further tax cuts. Choosing to enact further tax cuts presents the least opportunity for resolving the small problems Social Security will face and further weakens our ability to invest in the numerous efforts to strengthen the nation’s public health, education and job training, child care, health care and other vital infrastructures.

The fact of the matter is that the Social Security surplus is not – and should not be considered to be – untouchable. Is it a problem that in 35 years, Social Security will no longer be entirely self-sufficient? Sure, but it is not a financial crisis and it is relatively easy to resolve. The problem is certainly not exacerbated if the government uses current surplus funds to pay for pressing domestic needs instead of paying down a larger chunk of the national debt. Again, remember that surplus Social Security funds must be used for something – debt reduction, spending on tax cuts, or spending on programs for the current and future well-being of the country. The first use reduces the amount of money we have to pay each year in interest costs, which frees up money from general revenues to pay for increased Social Security withdrawals and future domestic needs. In the meantime, it does nothing to begin addressing those current domestic needs. The next option, tax cuts, does nothing to directly lower our interest payments or to reduce our total national debt. Tax cuts actually lower revenue, and thus limit our ability to address urgent domestic problems, all while providing very little – if any – help to the nation’s productivity or to increase the ability and number of workers to enter higher paying jobs. Tax cuts actually reduce the future ability of the country to pay for its priorities, first by reducing revenues, and later by doing little to increase the number of higher-income workers.

As Sen. Conrad noted, we must focus clearly on our country’s "long-term challenges." Unquestionably, these include ensuring Social Security remains the effective, protective safety net that it has been for the last 65 years. But, with so many additional pressing problems, the country cannot afford to hold to an arbitrary assignment of excess Social Security revenues to the sole purpose of debt reduction. In the current political environment, in which there is no common voice pushing for a freezing of the President’s $1.35 trillion tax cut to free up needed funds, it is time to reopen the debate about using Social Security's excess funds to address current needs – doing so will not harm Social Security and it will likely put the country in a stronger position 35 years from now to address the problems we will face then.