February 05,1999

BACKGROUND INFORMATION FOR HEARING ON SOCIAL SECURITY


WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE), today released additional information for the Committee's previously announced hearing on the general revenue financing of Social Security.

The hearing will be held on Tuesday, February 9th, in room 215 Dirksen, beginning at 10 am.

Background

The President's proposal to use the budget surplus (general revenues) to shore up Social Security's Trust Funds is the subject of this hearing. On January 19, 1999, in his State of the Union Address, the President proposed to transfer $2.8 trillion of the $4.5 trillion projected budget surplus to fix Social Security's financial problems through 2055. Of the $2.8 trillion, $2.1 trillion would be deposited in Social Security's Trust Funds, extending their solvency to 2050. (The other $700 billion would be invested in the stock market on behalf of Social Security.)

Social Security's Financial Problems. Key dates in Social Security's financial future:

2013: Social Security experiences a "cash flow" problem, i.e., annual revenues no longer cover benefits. Social Security will then have to tap its Trust Funds. Between 2013 and 2031, Social Security will need to draw $6.1 trillion, or about $324 billion per year, from its Trust Funds to pay benefits.

2032: Trust Funds are exhausted. Social Security can pay only 75 percent of benefits.

Note: Social Security's Trust Funds are invested in U.S. Treasury bonds. Redeeming the Trust Funds in the future would require either deficit spending; spending any available budget surpluses; cutting other Federal spending; or increasing taxes.

The President's Proposal to Improve Social Security Trust Fund Solvency. The President's proposal is complex, linking the paying off of the current public debt to enabling the Federal government to pay Social Security benefits between 2032 and 2050.

In brief, over the next 15 years the President would transfer $2.1 trillion of budget surplus (general revenues) to the Trust Funds. As under current law, these new revenues would be invested in U.S. Treasury bonds and earn interest. The Trust Funds' balances would grow, enabling Social Security to cover all benefits through 2050. However, since the Trust Funds do not hold cash, the surplus would actually be used to reduce public debt (currently $3.7 trillion). Under this proposal, the White House estimates public debt would drop from 45 percent of GDP today to less than 10 of GDP by 2014.

According to Social Security data, under the President's proposal, the Trust Funds will draw on average $1.2 trillion per year from 2032 to 2050 from the Federal budget, or $23 trillion by 2050, to pay all benefits. Where would these funds come from? In a January 19th briefing, NEC Director Gene Sperling suggested "interest savings [from reducing the public debt by 2014 that] are then allocated to Social Security...." Currently, interest payments on the public debt equal about 15 percent of the Federal budget. In other words, the proposal apparently assumes that by paying down the debt by 2014, budgets from 2032 to 2050 would be better able to pay Social Security benefits without other reforms.

Note that under the President's proposal, total government debt -- public debt and Federal debt (debt owed principally to Social Security) -- would rise, despite the reduction in public debt.

Issues to be Considered at the Hearing. On February 3, 1999, Finance Committee Chairman Bill Roth wrote to GAO head David Walker, asking him to evaluate the President's proposal and testify before the Committee on February 9th. (For a copy of the Roth letter: http://www.senate.gov/~finance/106-030.htm) Specifically, Chairman Roth asked GAO to clarify the President's accounting methods in using the budget surplus for Social Security, and address the question of whether the President's proposals will help solve Social Security's long-term financial challenges.

Lastly, since its inception, Social Security has been funded with a dedicated payroll tax. Workers "earn" Social Security benefits based on payroll tax contributions. General revenues have not been a significant source of Social Security financing. What are the implications for using general revenues to finance Social Security -- on the principle of earned benefits, and on future competition between Social Security and other government functions financed by general revenues?