Because of a booming economy, projections of the total Federal budget surplus continue to soar. Even the CBO, which has consistently been wildly in error in low balling surplus estimates, raised its projections last week for the fiscal 1998 surplus from $8 billion to around $55 billion.
Jack Kemp’s brain trust, which now should be considered more reliable than the thoroughly incompetent CBO, estimates that under current law the surplus will leap to $120 billion next year and $410 billion by 2003, for a total of $1.34 trillion over the next 5 years.
This gusher of available funds creates truly historic opportunities for long sought, fundamental reforms. This is not the time for themeless grab bags of small time tax cuts that please Beltway interests, but will never even be understood by the general public. Any plan that dissipates the surpluses without achieving fundamental reforms should be rejected.
These surpluses greatly enhance the feasibility of fundamental tax reform. For such reform, whether a flat tax or a national sales tax, must involve a major overall tax cut to ensure that everyone will pay less under the new system. Revenue neutral tax reform is impossible, for such reform will inevitably raise taxes on some while cutting them for others, creating intractable political problems. Kemp should at least be arguing for using the surpluses for a 12% -14% flat tax, which would reinvigorate the tax reform movement.
But the surpluses are critical as well for fundamental Social Security reform based on a private individual investment account option to the current system. Such reform involves a transition financing problem, as benefits to today’s retirees must continue to be paid, while workers are paying into their individual investment accounts rather than Social Security. The now projected huge budget surpluses can be used to pay most of these benefits to today’s elderly in the beginning years of such reform, making such reform far easier.
The highest priority for use of the budget surpluses has to be a private option for Social Security. For nothing else will do nearly as much to advance the liberty and prosperity of working people. Along the way, such reform would do more to reduce Federal debt than paying off the national debt, and would provide an enormous tax cut. When the reform is complete, total Federal taxes and spending would be reduced by about one-fourth.
The biggest problem for Social Security is not that it is inevitably headed for bankruptcy. The biggest problem is that it has become a bad deal for working people today, depriving them of the vastly greater prosperity they would enjoy if they could save and invest their funds through the private sector instead.
Take the example of a husband and wife entering the work force in 1985, each earning the average income each year for their entire careers. Projections in Cato’s new forthcoming book on Social Security, which I co-authored with Michael Tanner, show what would happen if this couple could save and invest in the private sector what they and their employers would otherwise pay into Social Security.
At just about half the average return earned in the stock market over the last 70 years, this couple investing in the private sector would retire with almost $1 million in today’s 1998 dollars. This fund would pay them more out of continuing investment returns alone than Social Security promises, while allowing them to leave the almost $1 million to their children. Or the funds could be used to buy an annuity paying them over three times what Social Security promises.
At a 6% real return on investment, which is still 20% -25% less than the average return on stocks over the last 70 years, this couple would retire with $1.6 million in today’s dollars. This fund would pay them about 3 times as much as promised by Social Security, while allowing them to leave the entire $1.6 million to their children. Or it would finance an annuity paying them 7 times what Social Security promises.
This enormous benefit would result not because the private sector would make better investments than Social Security. It results because Social Security makes no real investments at all. Social Security is a tax and redistribution scheme where almost all taxes paid today are immediately paid out to current beneficiaries on a pay-as-you-go basis. The private invested system, by contrast, pours its funds into real private capital investment that produces new income and wealth. That increased income and wealth is what finances the far higher returns and benefits of the private system.
Such reform would also eventually eliminate the current $9.5 trillion unfunded liability of Social Security, which is more than the recognized national debt outside of Social Security. Moreover, under the reform plan Tanner and I advance in the new book, the new private system would require 20% less in payments than the current Social Security system, providing an effective 20% payroll tax cut. Indeed, with those in the private system paying directly into the private accounts, the payroll tax would eventually be phased out altogether. With retirement, survivors and disability benefits eventually privately financed under the reform, federal spending as well as taxes would eventually be reduced by about one-fourth.
Workers around the world are increasingly enjoying these benefits through private sector based Social Security reform. Poll after poll shows American workers are demanding such reform here as well, with support consistently in the 65% – 80% range. U.S. political leaders who are still tiptoeing around this idea today are missing the chance for enormous benefits for the American people, and a prominent place in the nation’s history books.