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Let's Really Save the Social Security Surplus

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6/29/00 12:45 p.m.
Let's Really Save the Social Security Surplus
Mark Sanford's personal lockbox is a great idea.

By Jeremy Hildreth, senior economic analyst at American Skandia, Inc.

t's all true: "Privatizing" Social Security would allow people to achieve a market rate of return on their primary retirement savings, it would lessen the future liabilities of our public pension system, and would do so in a way that disproportionately benefits women and minorities. This is all to the good. But there's one more reason, often overlooked, why allowing people to sock away a portion of their payroll taxes each month into a personal account is a brilliant idea: It would keep that money from being spent by the government.

At the moment, the odds look better than ever for personal-accounts-based Social Security reform. George W. Bush's plan — a pretty good one — is selling like hotcakes (more or less), forcing Al Gore to come out with his own plan — a pretty bad one that does nothing to lessen Social Security's liabilities or increase its rate of return, but that at least pays homage to the idea of market investment of payroll contributions.

But we shouldn't let this tempered optimism prevent us from taking additional measures keep excess money out of Congress's coffers. History reveals beyond the shadow of a doubt that money left in the hands of politicians is as good as spent. Just in the last ten years, Congress has authorized self-imposed discretionary- spending caps on three occasions. It has broken them every time. This is no way to preserve surpluses, or to pay down Social Security's $21.6 trillion unfunded liability.

What's more, it's not annually authorized discretionary spending that's the biggest problem; it's mandatory spending. In 1962, discretionary spending accounted for 67.5% of the federal budget, while mandatory made up 32.5%. In four decades, that spending picture has virtually reversed: Mandatory spending has risen to 66.2% of the budget, while discretionary spending has fallen to 33.8%. In other words, Congress would be hard pressed to spend less money even if it wanted to!

The fungible nature of federal funds further reduces our ability to "save" Social Security, for whenever there is a Social Security surplus, that money automatically goes to cover any on-budget deficit. This has been the story most years since World War II, and the rapid growth in mandatory spending makes it increasingly likely that this will be the story again in the future. So basically the only to way to actually wind up with a real Social Security surplus is to have an on-budget surplus at the same time, as we do today.

Actually, there may be another way, too. Rep. Mark Sanford (R., S.C.) will introduce shortly a proposal called the Personal Lockbox Act, which offers serious promise (quite apart from its poll-tested nomenclature). The nifty idea here is that any time there is a Social Security surplus — even if there is simultaneously an on-budget deficit — the surplus would be "rebated" to taxpayers in the form of deposits into their new personal lockbox accounts. How much payroll tax each taxpayer paid would determine the size of his or her rebate, and account balances could be invested by the owner in some sanctioned mix of stocks and bonds.

Furthermore, because the rebates are de facto early benefit payments, each taxpayer's future Social Security benefits would be reduced by the share of the surplus placed into his or her account (additional, voluntary deposits up to $10,000 annually are also permitted under the plan but justifiably would not be counted in this offset). The end result is to reduce the amount of Social Security's total unfunded liability, while allowing people to achieve a higher rate of return on — and an ownership stake in — at least a share of their payroll contribution. Best of all, it would keep the government from spending the Social Security surplus, now or later, and establish a functional architecture for a complete Social Security overhaul.

The bottom line is that if God really did put Republicans on this earth to cut taxes, surely He would be pleased if they sought other meaningful ways, too, to control government spending and return fiscal resources to the people. Accounts-based pension reform is one such way. Mr. Sanford's Personal Lockbox Act is another.

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