SYNOPSIS: Implicit debts ignored

Administration officials haven't yet admitted that they will break their promise to protect the Social Security surplus, but their allies in the media and the think tanks are already preparing the fallback position -- that everything is O.K. as long as the federal budget as a whole is in surplus.

Let me pretend for a moment that the truth matters, and point out that real conservatives, who respect the lessons of the past, would disagree with the proposition that balancing the budget is enough. Why? Because the Social Security "lockbox" is the modern equivalent of a time-honored institution, the "sinking fund." A sinking fund was a sum of money that the government undertook to set aside each year to pay down its debt. Alexander Hamilton, our first Treasury secretary, established such a fund in 1795, and thereby made the fledgling United States creditworthy.

Hamilton understood very well that the sinking fund was in a sense a fiction: the government's ability to pay down its debt depended ultimately on its overall surplus, its excess of revenue over spending. But he also understood that it's very hard to maintain the fiscal discipline needed to pay down debt unless you establish a firm target. The sinking fund raised the fiscal bar: the government could not consider its house in order unless revenue was large enough, not only to cover current spending, but to make the scheduled debt repayment.

Two centuries later, the federal government faces a more complicated problem. It has $3 trillion of ordinary debt; but the really important debts are "implicit." They consist of promises to current and future retirees -- promises that the government will provide pensions under Social Security and medical care under Medicare. The burden of honoring those promises will be much reduced if we do our best to pay down the debt, explicit and implicit, over the next decade -- our last window of opportunity before the demographic deluge, when the baby boomers start collecting benefits.

Some people say that the federal government shouldn't be providing retirement benefits in the first place. I disagree, but in any case you can't just wish away promises that have already been made. If the retirement programs had never existed there would be no implicit debt. But privatizing the programs now would increase, not reduce, the implicit debt. If the payroll taxes of younger workers are diverted into private accounts, the benefits promised to current retirees and older workers will have to be paid out of other revenue.

It goes without saying that we should pay off the explicit debt -- though that is looking less likely with each budget revision. To go beyond this, and pay down implicit debt, the federal government must accumulate claims on the private sector, which can eventually be used to pay benefits. I favor eventually investing part of the Social Security surplus in broad stock indexes. Alternatively, claims on the private sector could take the form of private retirement accounts. That's a bad idea for other reasons, but it similarly has the effect of acquiring assets that will be used to provide benefits to future retirees.

To do any of this, however, the federal government must run large surpluses. And when there's a surplus, it's hard to resist the pressure to cut taxes and increase spending.

That's where the lockbox comes in. It isn't a real box, just as the sinking fund wasn't a real fund. But a rule that says that the government should not dip into the surpluses of the retirement funds, like the rule setting aside money for the sinking fund, makes it easier for politicians to act responsibly.

Sometimes you have to break such rules. A temporary raid on the retirement surplus to fight a recession -- or a war -- would not be a bad thing. But the key word is "temporary." And even though the Office of Management and Budget has assumed a much faster recovery than private analysts find plausible, its projection shows us dipping into the trust funds every year until 2006. The reason, of course, is that the Bush tax cut starts small and keeps getting bigger -- the opposite of what you would do if you really wanted to fight a recession. And those projected surpluses after 2006 are based on gimmicks that give smoke and mirrors a bad name. What was that about "honor and dignity"?

One wonders what would have happened to our country if Hamilton's ideas had been rejected in favor of mindless slogans like "It's your money!" We may be about to find out.

Originally published in The New York Times, 8.26.01