Board of Contributors: Don't Waste the Budget Surplus
The federal budget surpluses now projected for the coming years provide an unprecedented political opportunity for fundamental reform of Social Security. That reform would cut taxes now for every working person while laying the foundation for a more secure retirement.</br></br>First some budget facts. Lower defense spending, limits on the growth of nondefense outlays, and the surging tax revenue that has resulted from strong economic growth have combined to cut the budget deficit for the 1997 fiscal year, which ended in September, to only $22 billion -- about 0.25% of gross domestic product. The Congressional Budget Office projected earlier this year that the budget would be in surplus by 2002 and would remain there for the rest of the decade. The strong growth and high tax receipts of the past few months are now likely to require a revised budget forecast that accelerates the surplus, probably to the current fiscal year.</br></br>A decade of budget surpluses would be a welcome change after decades of budget deficits. Surpluses would automatically shrink the national debt, which has grown to nearly $4 trillion. A smaller national debt would mean lower future taxes to meet government interest payments. Budget surpluses would also automatically raise the national saving rate. That would finance increased investment in plant and equipment, raising productivity and real wages. And the higher national saving rate would make the U.S. less dependent on capital inflows from abroad.</br></br>But despite these desirable effects of potential budget surpluses, Congress and the Clinton administration are unlikely to let them last very long. That's because while there is broad public support for the goal of a balanced budget, there isn't broad support for running budget surpluses in order to shrink the national debt. So Washington is already talking about new spending initiatives and special-interest tax breaks that would eliminate those surpluses.</br></br>Fortunately, there is a better alternative that should have enough popular support to make it politically viable: using the projected surpluses to fund a system of mandatory Personal Retirement Accounts modeled on the very successful and widely used 401(k) plans. A system of PRAs would achieve the same gain in national saving that budget surpluses would. It would also have the popular appeal of a personal tax cut and yet the long-term benefit of more reliable retirement income with lower future taxes.