The debate over Moynihan’s tax cut was all bound up with worries about the government budget and its deficit, and with claims and counterclaims about the economic effects of a tax cut. Back and forth it went. Anyone who tuned into the debate and wasn’t confused by it must have been -- well, confused.
One learned from the debate that surplus Social Security revenue, supposed to build up a "trust fund", was swept in with other revenue when calculating the government’s intake, so that it made the budget deficit look smaller. Some Democrats went so far as to call this "embezzlement"; Moynihan himself called it "thievery". It was said that if the Social Security surplus were not pooled with the count of other revenue, the apparent deficit would rise from $138 billion to $204 billion.
On the other hand, one was told repeatedly that the Social Security surplus was "invested" immediately in Treasury IOU’s. Weren’t those IOU’s a part of the national debt? What was going on, here? Why did filling up a trust fund with IOU’s seemingly reduce the deficit? At the same time, why shouldn’t additional revenue (whatever the source) be expected to reduce the deficit?
This much of it was a problem in "bean counting". It seems that, while "surplus" revenue from the Social Security system was counted in the government intake, it wasn’t really "revenue" free and clear. Every dollar contributed to the Social Security "trust fund" represented some liability to pay out benefits in the future; unlike other revenue, it was supposed to be paid back some day to the taxpayers. This was properly reflected in the reserve fund’s purchase of Treasury IOU’s. The questionable part lay in the reckoning of the "deficit". Logically speaking, the deficit should register the year’s growth in the national debt. Congress, however, was reckoning it as the excess of expenditures over total receipts, including the proceeds of a forced loan. Thus, at the end of the year in question, if the budget forecasts came true, the national debt would have grown by $204 billion, but the year’s deficit would be reckoned as only $138 billion.
Towards the end of the Moynihan debate, there was a proposal to correct at least this part of the bean-counting problem; after 1991, payroll taxes would not be counted as a reduction of the deficit. [5] The proposal dropped out of the news; for what it’s worth, current practice calculates the deficit as before, but follows it immediately with figures for "On-Budget" and "Off-Budget" components. [6] The accumulated national debt is shown with trust fund holdings subtracted out, but the figures are provided, so the interested reader can readily put them back in. [7] Popular discussions of the debt do put them back in. [8]
For those who really enjoy bean-counting, though, further delights are in store.
An accountant from an insurance company, if asked, would relate that future benefits must be estimated from actuarial tables (projecting survival rates unto various ages). In addition, since they won’t be paid until various dates in the future, they have to be discounted by some estimate of the return on capital. Although experts in the Social Security Administration and some in private "think tanks" have all along made estimates of that sort, no such estimates are included in the reckoning of the national debt, except insofar as they went into the planning which created the Social Security reserve fund. If that fund has underestimated future obligations, or if it has overly discounted futurity, or if the fund is smaller than the estimates would require, then our real national debt is even larger than we suppose. Indeed, such is the case: the trustees of the fund have already reported that it is inadequate for the long run. [9]
Let’s get back to the charge that Social Security funds were "embezzled", in that the surplus revenue from payroll taxes was applied to general government expenditures. This was not a bean-counting problem, but additional bean-counting would have helped. In the annual report of a private company, the cumulative results of the year’s activities are combined with those of past years in a balance sheet, showing how the company now stands. The balance sheet has two sides: one side lists all of the company’s debts and (perhaps) an item called "earned surplus"; the other side lists assets. Analysts study the assets to judge whether they are adequate to cover the debts, meet payments as they become due, and generate a continuing stream of income.
Were the Treasury to prepare a list of assets, including everything upon which a future return is expected, in its reports to Congress and the public, attention would be focused much more quickly upon problems such as the "embezzlement" of the Social Security reserve. [10] On one side of the balance sheet would appear a large chunk of national debt owed to the Social Security system; on the other side, if the government frittered away the proceeds upon current expenditures, there would appear a growing insufficiency of assets. Of course, this would raise questions as to what should be counted as assets and how they should be evaluated. In all probability, there would be a real catfight over definitions, as the pressure would be intense to shift expenditures toward economy-building activities. That’s exactly what is needed. [11]
We’ll come back to that question. First, though, let’s look into a related issue that came up in the 1990 debate.
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