The $12 Trillion Temptation

By Christine Gorman

The idea takes some getting used to at first. Social Security is in trouble again. Only this time the problem is not too little money but too much. Thanks to a series of increases in payroll taxes that began in 1984, the retirement trust fund currently takes in $109 million more each day than it pays out in benefits. Federal officials expect the accumulated surplus to exceed $100 billion by December and, in the next 40 years, to mushroom to $12 trillion. Every penny will be needed to pay for the future retirement of today's 24- to 42-year-olds, the budget-busting baby boomers. But as the stockpile grows, so does the urge to raid the reserves. After all, the 21st century seems so far away.

By law, the surplus can be invested only in Government-insured securities. So far the trust fund has been used to buy Treasury issues -- in effect, financing part of the federal budget deficit. Legislators, however, have proposed using the money for everything from expanding current Social Security benefits to paying for housing for the homeless. Others clamor for a tax cut. Many Washington watchers fear that the Government will simply fritter away the reserve, leaving nothing to the future. Says Geoffrey Carliner, executive director of the National Bureau of Economic Research in Cambridge, Mass.: "As politicians see the trust fund build up, the temptation to spend it on today's recipients or to reduce payroll taxes will only grow."

Congress overhauled the retirement program in 1983, after dire predictions that the Golden Age for the post-World War II generation would bring on the Dark Ages for Social Security. Before the reforms, the trust fund had worked more like a chain letter than a pension plan. Each current retiree's benefit check required payroll taxes from four current employees. But so many children were born right after the war and so few after 1964 that the pay-as-you-go system threatened to collapse when the boomers retired. In the first half of the next century there will be only two workers to pay benefits for every retired person. The solution: create a reserve by raising the payroll bite for Social Security from 5.4% in 1983 to 6.06% in 1988. Thus, for the first time, today's workers will pay part of their own retirement as well as that of their parents.

What to do with the money until it is needed? Democratic Senator Terry Sanford of North Carolina has introduced a bill that would require the trust fund to make loans for education and economic development. Republican Congressman Bill Green of New York wants to invest the fund in public works like housing projects. Says he: "The future, albeit temporary, riches of the Social Security system offer us a genuine opportunity to deal with some pressing national needs." But critics charge that using the surplus for general governmental programs creates a demand that is hard to turn off once the need for the retirement funds is at hand.

A better strategy, says Democratic Senator Daniel Patrick Moynihan of New York, would be to save the surplus and, in the process, put the U.S. back on solid financial ground. His plan: continue buying Treasury securities. If Congress were actually to balance the budget, the Government could use the Social Security surplus to buy back gradually the nation's $3 trillion debt from its domestic and foreign owners. Instead of tying up their resources in Government IOUs, investors would have to funnel their assets into private industry. This would promote economic growth. The process, says Moynihan, "will put the federal budget back in the black, pay off the privately held government debt, jump-start the savings rate and guarantee the Social Security trust funds for half a century and more."

Already, three other nations have faced similar surplus quandaries. Japan restricts excess retirement money to a reserve fund, which boosts the country's savings rate. The Canadian government lends its pension cushion to provinces to support schools and build roads, and Sweden's fund is used to finance mortgages and pay off debt. Lending the money can be a good idea, says Barry Bosworth, a senior fellow at the Brookings Institution, "if the loan goes to develop capital growth and productivity rather than consumption."

In the U.S., however, lawmakers have already used the pension reserve for a far less noble cause -- to help mask a big part of the federal deficit. Since Social Security receipts count as part of the overall budget, congressional projections indicate that the deficit should gradually shrink from $150 billion in 1987 to $134 billion in 1993. Without Social Security's extra padding, however, lawmakers would be forced to admit an unpleasant reality: the deficit resulting from all other Government programs will actually grow from $170 billion in 1987 to $231 billion in 1993. Says Bosworth: "The basic budget deficit is getting worse, not better." As long as income from Social Security taxes makes the gap look smaller than it really is, Congress may never come to terms with the deficit.

Other experts worry about just the opposite possibility: that the Social Security program will push the overall budget substantially into surplus. If Government revenues far exceed spending, less money will be available for businesses and consumers. That could produce a drag on the economy or even a recession. Already, says Robert DiClemente, a senior economist at Salomon Brothers, "many people are now paying higher ((Social Security and Medicare)) payroll taxes than income taxes." The thing to do, argues Robert Myers, chief actuary of the Social Security Administration from 1947 to 1970, is to cut the payroll tax so that the trust fund has no more than a six- to twelve-month cushion. The only problem with that solution: it virtually guarantees that sometime in the future, lawmakers will have to slash retirement benefits or raise taxes sharply.

Some analysts doubt that the expected 40-year buildup in the Social Security fund will come to pass. Ben Wattenberg, a senior fellow at the American Enterprise Institute, predicts that within the next decade, soaring health- care costs could overwhelm the Government's Medicare fund, which is partly financed by the same payroll taxes that go for Social Security. If that happens, he says, Congress might keep Medicare going with money from the retirement fund. "And when that money has paid for Medicare, who will finance the retirements of the baby-boom generation?" he asks. Welcome to the budget debates of the 21st century.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

[TMFONT 1 d #666666 d {Source: Social Security Administration}]CAPTION: NOW YOU SEE IT, NOW YOU DON'T

Social Security Trust Fund assets in trillions of dollars

DESCRIPTION: Social Security Trust Fund assets, 1980 and projected into 2050; color illustration of older woman in rocking chair.

With reporting by Jerome Cramer/Washington and Frederick Ungeheuer/New York