Back in August, the Congressional Budget Office (CBO) projected a federal budget surplus of $176 billion for fiscal year 2002. This projection consisted almost entirely of a surplus generated by the Social Security trust fund rather than by the federal government's operating budget.
Furthermore, CBO projected that the operating budget would fall into deficit in following years, leading many commentators to charge that the government was about to "raid" the Social Security program in order to cover such deficits. The charges claimed that political agreements to "lock-box" Social Security had been broken, and that future Social Security recipients would shoulder the burden of this breach of faith.
The battleground for this debate was in late August and early September, as Congress and the Administration were in the process of hammering out the budget details for fiscal 2002. But then came the terrorist attacks of Sept. 11.
Thrust into a bona fide national crisis, our politicians temporarily forgot about party lines and immediately rallied behind huge increases in federal spending (about $70 billion) for disaster recovery, new security measures, counter-terrorism activities, the airlines, and the military. In November, Congress and the Administration agreed on an even larger package of spending increases and tax cuts to help counter the adverse impacts of the terrorist attacks on the U.S. economy.
This dramatic fiscal policy response, together with slippage of the economy into recession during the early part of fiscal 2002, inevitably will result in dissolution of most, if not all, of the budget surplus CBO had projected just before the attacks. Has anybody been claiming that this constitutes a massive raid on the Social Security program? The answer is no. The "raid" and "lock-box" arguments were fraudulent to begin with and, in a time of real national crisis, nobody has the gall to beat that drum again.
The fact is, the Social Security trust fund will continue to run large surpluses. These surpluses, in turn, will be slipped to the Treasury in exchange for non-marketable, interest-bearing government obligations. If the operating budget deficit is larger than the Social Security surplus (that could happen this year), the Treasury will simply issue debt in the financial market to cover the difference. There is no raid, at all, on the Social Security program.
This doesn't mean that the government should be permitted to run budget deficits forever, since persistent demand by the Treasury on the nation's credit markets puts upward pressure on interest rates and disadvantages credit-intensive sectors such as housing. But the current situation is a special and temporary case that must be tolerated.
Spend to mend
The government should spend and cut taxes when the country is in trouble. This helps the economy regain its footings and resume its role as a great revenue-generating machine. On the other side of the ledger, much of the emergency spending clearly is temporary. Large surpluses in the unified budget will be reestablished soon, and then the Treasury can go about the business of paying down the mountain of federal debt accumulated when the country was running persistent deficits during the 1980s and most of the 1990s.