President Clinton's rhetoric about Social Security has everyone talking glibly about using the budget surplus to "save" the program. But what exactly does that mean?
We now know what President Clinton 
means by it. He has proposed to take
the unprecedented step of financing Social Security from general
revenues.
Under his proposed plan, all payroll tax revenues would continue to be
credited to the Social Security trust fund. But the government would
also use 62 percent of the total budget surplus to buy government bonds
on the open market, to be held by the Social Security trust funds. When
the government needed the money to pay Social Security benefits in the
future, those bonds would be sold on the open market again, reducing
national savings, or they would be redeemed by the federal government in
cash from the taxpayers.
In this process, general revenues, beyond Social Security payroll tax
revenues, are used to buy the extra bonds in the first place, which are
then given to the Social Security trust funds. Few seem to understand
what a drastic and fundamental change this would be for Social Security.
Up until now, Social Security has been financed by the payroll tax, not
by general revenues. This limits the program only to spending current
payroll tax revenues, or the amount of past payroll tax revenues plus
interest credited to the trust funds (in addition to revenues from the
taxation of Social Security benefits.)
But if general revenues can be used at any time to buy bonds to be given
to Social Security, there is no limitation on Social Security spending.
Social Security would then have an open-ended claim on general taxpayer
funds, in addition to payroll taxes. Every election would then be fought
over spending even more on Social Security by drawing even more from
general taxpayers. There would never be another tax cut again because it
would give away funds the liberals would claim for a perpetually bigger
and bigger Social Security . This is why conservatives have always been
careful about preserving the original limitation that Social Security is
to be financed by payroll taxes, not general revenues.
But liberals have always opposed general revenue financing of Social
Security as well. Franklin Roosevelt recognized it was the link between
payroll taxes and benefits that allowed Social Security to be called
"social insurance" rather than welfare. Because of the payroll tax,
workers believed they had paid for their own benefits and, therefore,
were entitled to them. This was the key to the political success of
Social Security.
If Social Security is now to be financed in part out of general
revenues, then there can be no justification for paying such general
taxpayer funds to those not in need. As a result, Social Security would
eventually have to be means-tested. It would then have been changed into
a welfare program. In this sense, Mr. Clinton's plan would destroy
Social Security.
Republicans, therefore, must recognize they cannot in any way accept Mr.
Clinton's plan to use general revenues to fund an otherwise ongoing
Social Security program with no real change. They cannot set a precedent
for an open-ended claim by Social Security on general taxpayers. That
would be a travesty of the highest order.
There is only one way the general surplus can be acceptably used to save
Social Security. That is to finance the transition to a system of
personal investment accounts.
As workers use their payroll taxes in whole or in part to fund such
accounts, the government would then make up the lost revenue for Social
Security from the surplus, as well as other possible sources, in order
to keep paying benefits in Social Security's waste-as-you-go system. In
this process, the new system would eventually replace the current Social
Security framework, and general revenues would not be used to fund an
ongoing Social Security system creating the above problems.
Even in the remote case where a significant number of workers
continually chose Social Security over the personal accounts, after the
transition the system would go back to financing their benefits on a
pay-as-you-go basis out of payroll taxes rather than general revenue.
Republicans should not be shy now about proposing a personal account
option for at least part of Social Security rather than adopting Mr.
Clinton's plan. Poll after poll after poll show two-thirds to
three-fourths of the American people support such an option.
Moreover, such reform is sweeping the world. Eight countries in Latin
America now have a personal investment option. In Europe, Great Britain
has been followed by Hungary and Poland, and even socialist Swedes
started a private option for part of its system last July. But the
Swedes are pikers compared to the supposedly-Red Chinese, where workers
pay half their retirement money into investment accounts. Australia
adopted a private account system in the early 1990s under a Labor
government.
Finally, no other reform would do so much to increase the liberty and
prosperity of the American people.
