To: Ross Perot

From: Jude Wanniski

Re: Hoarding the Surplus

There are persistent rumors that you believe Arizona Sen. John McCain
is just what the doctor ordered if we are going to save the Social
Security system when the baby boomers begin to retire en masse in
2012. Presumably this is because you see McCain wanting to earmark the
surplus revenues now flowing into the U.S. Treasury from the SSI payroll
tax … and to use the surplus flowing into Treasury from the
income tax to pay down the national debt. Ross, I hate to break
the bad news, but if we actually did what McCain wants to do, the Social
Security and Medicare accounts will be bankrupted in the year 2020. Your
worst fear — that SSI taxes for employers and employees would have to
be doubled in order to keep them solvent — will be unavoidable. For
that matter, the plans of the other presidential contenders in both
major parties would have the same result. You cannot save Social
Security by paying down debt in the years immediately ahead. You can
only save Social Security by gradually building a national economy that
will be able to support the boomers when they retire.

If you stop to think about it, Ross, you will realize the problem
boils down to the number of workers available to support the number of
retirees. Three workers now support a retiree. In 2020, there will be
only two workers per retiree. Paying down the national debt will not
increase the number of workers. All it would enable the government to do
would be to go deeper in debt in our general fund by borrowing what we
need from other countries. Either that, or we have to tax each worker’s
output by 50 percent more to pay the cost-of-living and health-care
costs of our seniors. Do you see what I mean?

Normally, this kind of flaw in the national debate would have been
exposed long ago. Unfortunately, once President Clinton saw he could
make points by accusing the Republicans of using the “surplus” to give
tax cuts to the rich — instead of saving Social Security — the issue
was incorrectly framed. The Republicans could have said the president
was mistaken, that his method of locking up the surplus for use in 20
years could not begin to solve the problem of too many retirees per
worker. Only steady additions to the nation’s capital stock could
solve the problem painlessly — so that each worker would have 50
percent more capital in 2020 than he or she has today
. This is not
something that we can wait to the last minute to do, Ross. You can’t
increase the economy’s productivity by 50 percent all at once. It has to
be done each year, a little at a time, and it can only be realistically
done by lowering the risks to capital formation and increasing the
rewards to successful capital formation.

Think of the debt problem we face at two levels, with two sets
of books. We now have a publicly held national debt of $3.6 trillion,
which has accumulated over the last half century. It sounds bigger than
it is because of the inflation we’ve experienced in the last three
decades since we went off the gold standard. In 1945, the national debt
was 130 percent of national output and today it is only 40 percent. This
is the debt that President Clinton vows to eliminate entirely over the
next decade. The other set of books, though, shows an actuarial
deficit of almost $7 trillion. That is, we know how many people there
are in the national economy and how old they are and when they will
retire. Even if the objective of “retiring the publicly held national
debt” by 2013 is realized, the federal government’s total debt by then
still would be more than $1 trillion higher than it is today. In 2013,
at the same time the administration forecasts complete retirement of the
current $3.6 trillion in publicly held debt, it projects total federal
debt of more than $6.8 trillion, of which $4.2 trillion is due to the
Social Security system. These are the holdings of the SS “trust fund”
which is simply an accounting of the treasury’s obligation to restore to
the retirement system the surplus payroll tax proceeds which are now
being used to pay down the publicly held debt. As this unfunded
liability to the retirement system is redeemed, in all likelihood it
would be financed through issuance of new debt to the public. The
current exercise, then, is largely a matter of paying down publicly held
debt now in order to restore it — and more — in the future.

Clearly, none of this would make the slightest difference to
sustaining the Social Security guarantee under the current
payroll-tax/benefit structure. Despite appearances to the contrary,
the accumulation of trust fund balances has no relationship to the
system’s capacity to fund future benefits
. Without reforms to
increase economic efficiency so that two workers can provide the
per-beneficiary income stream that is today supplied by three workers,
the system will become an increasing burden to taxpayers starting in the
2020s. Nevertheless, the administration is maintaining the pretense that
the trust fund build-up represents real economic assets that can be
drawn upon to meet future benefit requirements. It also goes a step
further, laying out in its 2001 budget submission a plan for crediting
the trust funds with the interest savings resulting from the retirement
of public debt. “Devoting Social Security surpluses to debt reduction
will reduce interest payments from $230 billion in 1999 to zero in 2013
and will dedicate interest savings to extend Social Security solvency to
2050.” The proposal, in reality, would do no such thing. It simply would
expand the trust fund’s accounts sufficiently to keep the fund showing
positive balances beyond its currently estimated drop-dead date of 2034.
Meeting benefit requirements still would require Treasury to raise the
resources needed to redeem the IOUs.

Surveying the political landscape offers little promise that this
delusional approach soon will be corrected. Republican congressional
leaders essentially have been co-opted by the White House into accepting
the objective of debt retirement as an end in itself. In the Republican
presidential campaign, the surging “insurgent” John McCain has made a
commitment to debt reduction synonymous with his vaunted display of
character. George W. Bush has had little choice but to concede that he
too would place a high priority on paying down the national debt. Among
glum senior Republican staffers on Capitol Hill, there is little
expectation that the debt obsession will be a passing phase for the
party. “The idea,” said one, “that there is an opportunity cost to
paying off the debt is not even broached.”

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