If the vitriol of its enemies is any measure, then the prospects of privatizing Social Security are getting better by the day. After all, if the political chances of privatization were dim, then opponents wouldn't waste their time devising ever more shrill arguments against it.
Indeed, they would welcome a serious effort to privatize Social Security in order to take advantage of the backlash and restore Democratic control of the White House and Congress.
Thus I view economist Paul Krugman's ill-tempered blast at the Social Security Commission's recent report as a sign of progress. Writing in The New York Times, where he is the resident blowhard, Krugman ridicules a comment made by commission member Thomas Saving that the Social Security Trust Fund does nothing to ensure the payment of future Social Security benefits. "He's just plain wrong," says Krugman, without offering any explanation for why.
The major problem with discussing the exact meaning of the Social Security Trust Fund is that it has deliberately been made confusing. It is even hard for budget experts to fully comprehend. So it is not surprising that the general public is easily misled by those with axes to grind.
The real source of confusion dates back to 1968. President Lyndon Johnson had appointed a commission to study federal budget concepts the previous year. Among its recommendations was the merger of the various federal trusts funds, of which there are now 110, into what was then called the administrative budget. Previously, trust funds had been accounted for separately, which the budget commission thought was confusing.
The idea was to get a clearer idea of the government's total revenues and expenditures. Unification of all budget accounts would give financial markets a better fix on the federal government's borrowing requirements. It would also be helpful in determining the government's fiscal stance for macroeconomic purposes.
In general, economists still agree with this approach to budgeting. However, the budget commission's recommendations also had political implications, which President Johnson quickly recognized. As he was preparing his last budget, issued in January 1969, he wanted desperately to show it in balance. The government had not run a budget surplus since 1957, and with inflation a growing problem, it was widely believed that balancing the federal budget would be a big help.
During much of the 1960s, Social Security outlays exceeded income. This was not viewed as any sort of problem, even though it meant that the trust fund's assets fell. But in the late 1960s, income began exceeding outlays, meaning that the trust fund's assets were rising again. Under the administrative budget, Social Security surpluses were kept separate, but under a unified budget concept, they would be included.
To make a long story short, it turned out that the Social Security surplus in fiscal year 1970 was just enough to push the unified budget into the black. The Social Security surplus was $3.9 billion that year, and Johnson proposed a budget that would be in surplus by just $3.4 billion. Thus, without the inclusion of Social Security, his final budget would have been in deficit, not surplus.
Every subsequent administration has done the same thing Johnson did. A Democratic Congress even codified it in the Budget Act of 1974. Henceforth, Social Security's operating surplus or deficit would always be included in overall budget totals.
Until the early 1980s, the inclusion or exclusion of Social Security made no significant difference to the budget. Its surpluses and deficits were on the order of a couple of billion dollars. But as a result of the 1983 Social Security Commission, chaired by Alan Greenspan, that changed radically. It proposed and Congress enacted a major increase in Social Security taxes, far more than necessary to pay for near-term benefits, which resulted in large Social Security surpluses. These surpluses are dutifully accounted for and added to the trust fund, where they earn interest and grow ever larger.
But the size of the trust fund, or even its existence, neither adds to nor detracts from the government's ability to pay Social Security benefits. Benefits do not rise when the trust fund gets bigger, nor do they fall when the trust fund gets smaller. All that really matters is whether the federal government has sufficient revenue from all sources to pay all its bills, including Social Security benefits.
The central problem is that projected outlays for Social Security are rising sharply as the result of the impending retirement of the baby boom generation. If nothing is done to reduce benefits, then either taxes will rise, non-Social Security spending must be cut or large budget deficits will re-emerge. And the magnitudes are large, making them impossible to ignore.
The Social Security trust fund is simply irrelevant to this calculation. It is not some pot of money outside the government that can rescue us from raising taxes, cutting spending or running deficits. All it does is cloud the issue, so much so that even Princeton economics professors like Paul Krugman apparently can't figure it out.