SYNOPSIS: More budget tricks You're a middle-aged couple, at the peak of your earning power. You are saving in preparation for your retirement, a little more than 10 years from now. You consider paying off your mortgage early. But the bank informs you that you would face prepayment penalties. Do you (a) stick with your plan to prepare for retirement, but buy stocks and bonds instead of paying off your mortgage, or (b) say, "Oh, in that case let's forget about the future and take an expensive vacation"?

George W. Bush would apparently answer (b). For that is the essence of his latest argument for his tax cut.

Right now the federal government is running a large budget surplus; but most of that surplus comes from Social Security and Medicare, programs that rely on payroll taxes to pay benefits to retirees. Those programs must run surpluses now, while the baby boomers are still paying into them, if they are to avoid either sharp tax increases or sharp benefit cuts when the boomers retire. Both programs are, in other words, pretty much in the position of that middle-aged couple a decade or so from retirement.

Mr. Bush likes to declare that a surplus means that the government is collecting too much in taxes. But it means no such thing if the surplus is mainly a matter of preparing for the fiscal consequences of an aging population. And it is. Nonetheless, Mr. Bush's advisers continue to search for reasons that doing the responsible thing is actually a bad idea.

True, Mr. Bush insists that he will not raid the Social Security surplus. But he has conspicuously refused to make the same promise for Medicare — and has also refused to consider proposals that would make future tax cuts contingent on actual surpluses, instead of locking them in on the basis of highly questionable projections. Why? Because if you make realistic estimates both of future spending and of the costs of Mr. Bush's proposed tax cut (which will end up being at least $2 trillion, and probably considerably more), it becomes clear that he will use up all of the Medicare surplus and make a substantial dent in the Social Security surplus too.

Oh, and Mr. Bush also proposes to divert about $600 billion of Social Security taxes into new personal accounts for younger workers. This further reduces the funds available to pay for the retirement of today's middle-aged workers.

Let's not forget that Texas is now in serious fiscal difficulty thanks to the tax cut Mr. Bush pushed through as governor — a cut that he helped sell with tricky accounting, including a supposed two-year Medicaid package that was actually only budgeted for 23 months.

All this is old hat. What's new is Mr. Bush's latest argument — that since about a third of the federal government's debt is in effect subject to early repayment penalties similar to those associated with some mortgages, it would actually be irresponsible to run a surplus large enough to pay off the national debt.

Now he's right that this may be an argument against repaying that part of the debt. But to say that it justifies dissipating the surplus in tax cuts is exactly like saying that the couple we started with, frustrated in their plan to pay off their mortgage, should give up on planning for retirement.

The responsible thing, for both the couple and the federal government, is not to give up on planning for the future; it is to make alternative investments. And if this means that the Social Security and Medicare trust funds must buy stocks and bonds from the private sector, so be it.

Some people — including, alas, Alan Greenspan — have made it seem as if any purchase of private-sector assets by the trust funds would instantly politicize the financial markets and undermine the foundations of the free-enterprise system. But that's ideology, not analysis; people who have looked seriously at the issue think that these concerns are vastly overblown. There are well-established techniques for protecting government investment accounts from political meddling, such as legal requirements that the funds buy a broad index. Are these techniques imperfect? Maybe — but who would argue that rather than running some slight risks of politicizing the markets, we should squander the money that was supposed to pay for our retirement?

Only a politician with an irresponsible tax cut to sell.

Originally published in The New York Times, 2.28.01