Social Security Must Learn to Live on Its Own; The so-called surplus is an illusion.
At a time when the overall government budget remains in terrible deficit, the Social Security programs appear to be running a $50 billion annual surplus by taking in more than they pay out. Running surpluses to accumulate reserves in the Social Security trust funds is part of a plan to prepare for the surge of benefits that will begin 25 years from now when the baby boom generation reaches retirement age. Without the accumulation of substantial reserves, the payroll tax rate would have to jump substantially from the current 15 percent combined rate on employers and employees to meet the increased benefit obligations. So the idea of accumulating a substantial Social Security reserve is certainly a good one.</br></br>Unfortunately, however, most of the so-called surplus that currently appears in the Social Security accounts is simply the result of a subsidy from general tax revenue. This year the Treasury will transfer about $30 billion of general funds into the Social Security trust funds, thereby accounting for 60 percent of the officially recorded Social Security "surplus." Using general Treasury funds for the Social Security accounts makes the regular "on budget" deficit worse by $30 billion.</br></br>The subsidy to the Social Security trust accounts has two pieces. The first is the result of the 1983 legislation that half of Social Security benefits be subject to income tax for single taxpayers whose incomes exceed $25,000 and married taxpayers with incomes over $32,000. Although the basic rationale for this taxation is that Social Security income should be taxed like other personal income, a political compromise at the time this tax increase was enacted required that the extra tax revenue be transferred to the Social Security trust fund. This transfer will grow from about $4 billion in the current year to $5 billion a year in 1991.</br></br>The second and much larger subsidy applies to the Medicare part of the Social Security trust fund. The Medicare program of health benefits for the aged consists of two parts. Hospital insurance is provided automatically and is funded primarily by Social Security payroll tax collections. Although participation in the supplemental medical insurance part of Medicare that pays for physicians' services and outpatient visits is voluntary, almost all retirees participate. The original Medicare legislation called for the premiums paid by individual retirees to cover half of the cost, with the remainder coming from general revenue. But now the premium portion has declined to only one-fourth of this year's $35 billion cost, with the remaining three-fourths, or $26 billion, coming as a subsidy from general revenue. That subsidy is scheduled to rise to $39 billion in 1991.</br></br>The transfer of general revenue to the Social Security trust funds does nothing to change the overall government deficit and the national rate of saving. But reducing the budget deficit and achieving an appropriate accumulation of Social Security trust fund reserves will be politically easier if the Social Security trust funds are kept separate from the general revenue accounts. That's why Congress voted in 1983 to back up its plan to accumulate Social Security trust funds with a change in government accounting that officially took Social Security "off budget."