oversight

The Question of Rolling Back the Payroll Tax: Unmasking the Deficit Illusion

Published by the Government Accountability Office on 1990-02-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             UnkedStatesGeneralAccoundngOi!Ece
                             Testimony
GAO

                                                    -_ -
       For Release                    TBE QUESTION OF ROLLING BACK
       on Delivery                    TEE PAYROLL TAX:
       Expected    at                 UNMASKING TEE DEFICIT  ILLUSION
       2:00 p.m. EST
       Monday
       February    5, 1990




                                      Statement    of Charles       A. Bowsher
                                      Comptroller     General     of the
                                         United   States

                                      Before    the
                                      Committee     on Finance
                                      United   States   Senate




                                   c+t--(&&-      iiLfc’55       ‘5
GAO/T-HRD-go-10
                                              SUMMARY


The use of       growing    Social     Security        surpluses     to mask the deficit
in federal       operations     amounts to          blue smoke and mirrors.       It has
encouraged       avoidance    of the hard           choices     that must be made if the
government       is to bring       its fiscal        operations      closer to balance.
Despite   the discipline           the Gramm-Rudman-Hollings                  process        was
supposed    to bring      to deficit        reduction       efforts,        the deficit          in
federal   operations        remains     virtually         unchanged       since     fiscal
1985. Congressional           Budget Office         projections         show that         if
current   policies       continue,       the general         fund deficit          will      grow to
over $300 billion         by 1995. Should            that   happen,       general       fund
interest    payments      could become the largest                 single       item in the
federal   budget       and might      well    surpass      defense      and social
security.     Interest      costs     of this      magnitude       would severely              hamper
efforts   to achieve        major policy          goals    and to address           unmet needs.
The Administration             has offered       a proposal      which eventually       would
better     highlight       the masking       effect     of Social     Security    surpluses.
But this      proposal       phases in gradually           over the next 6 years.          Even
if all     the assumptions         underlying        the Administration's         budget     are
realized,       the national       debt would still           rise   by over $1 trillion
-- to $4 trillion            -- before     the general        fund is in balance.         The
CBO baseline         projection      shows the debt growing            by over $1.5
trillion      over a similar         period.      Should Congress       act to reduce
Social     Security       payroll    taxes     to a pay-as-you-go         level   without
offsetting        budget     cuts or provision          for added revenue,        an
additional        $300 billion       could be added to the national               debt.
The burden of financing           retirement       benefits      will    increase       in the
future    as the baby-boom        generation       retires.      Adopting      policies
today that promote         sustained      growth     in years       to come will        enable
future    workers    to bear more easily           this     heavier     burden while
still    enjoying    a rising     standard      of living.        Chief    among those
policies     is bringing      the deficit       in federal       operations       closer      to
balance     and using Social        Security      surpluses       to increase       national
savings.

However,    if we allow     accumulating       Social     Security        reserves    to
become an excuse for inaction            -- if we continue             the illusion      that
the deficit    problem    is being      solved    when, in reality,             it is
merely   being hidden     from public       view -- then these surpluses                 will
have no real     economic    meaning.      Future     workers     will      be no better
off than if we had returned           to pay-as-you-go          financing         and were
forced   to address    the general       fund deficit        through       other    means.
To solve      this  fundamental   problem,   our political                    leadership      must
find    a way to negotiate      a multiyear,    politically                   sustainable
budget    strategy.     We hope that Senator     Moynihan's                   proposal    will
provide     the catalyst     to compel such action.
Mr.         Chairman            and Members                   of         the        Committee:



I     am pleased                to     be here              today              to    discuss                our     views           on Senator

Moynihan's                  proposal            to         return           Social              Security                to     a pay-as-you-go

basis.            This          proposal              forces              the        Congress                and the               American             people

to         face    squarely              the        budget               deficit            problem                and        to    deal        with      the
blue          smoke         and mirrors                    that          have        characterized                        our       budget         process
for         several            years         now.           I would                 like        to      commend you,                    Mr.

Chairman,                for        promptly               scheduling                  these            hearings,                  which        provide

an appropriate                         forum         for      airing                these            issues.


Last          year,         Senator            Moynihan                  asked         us to            review            the       current             Social

Security               financing               plan.               In      our       report'                to     him        and      later       in      this

statement,                  I present                our      views              on the              potentially                   desirable
economic               effects           of     accumulating                          reserves               as well               as the

    implications                of      the     current                  financing                   plan         for        federal           budget
policy.


I am pleased                    that          a public              debate             has begun                   on these             important
    issues.            The caliber                   of      the         debate            is        important--it                     must      be

grounded               in      fact,          not      fiction.                     And,        it      must            involve         honest

discourse.                     We have          difficult                      financing                decisions                  to make and
    serious           fiscal           problems              to     solve.                  We need                to        disclose           fully        the
    real      status           of      our     current                  fiscal         affairs                   to make           informed
    judgments.                 We must              face      the          facts.

    lSocia1  Security:                         The Trust   Fund Accumulation,  the                                                     Economy,            and
    the Federal   Budget                       (GAO/HRD-89-44,   Jan. 19, 1989).
Senator            Moynihan                is        correct              in    focusing                 attention               on the           extent

to     which           Social          Security                reserves                have         masked              the      general            fund

deficit.                   I believe,                 in     fact,             that         the     luxury              of      these          reserves

has provided                     a convenient                      excuse             for         avoiding              the         tough        choices
needed           to        cut      the     general                fund         deficit.                  This          discouraging                   story

is     told        in       table          1,        which          is     attached                to my statement.



The actual                   1989      general               fund          deficit2                was $275                  billion--$8

billion            larger            than            this      deficit                in     1985,          the         year         before         Gramm-

Rudman-Hollings                           took        effect.                  Despite             the      intended                 pressures             of

Gramm-Rudman-Hollings,                                      we have             failed             to     reduce              the        underlying
deficit               in    government                  operations.



The value                  of    the       Senator’s                 proposal                 is     that         it         compels            us to
focus         on numbers                   like            these.              Unfortunately,                          however,             attention

has        been        diverted                 by     suggestions                    that         his      proposal                 would         lead     to
cuts        in     Social            Security                 benefits.                     This         assertion                  is    not
correct.                   The Senator                  merely             proposes                to     return              Social            Security
to     pay-as-you-go;                           which         is         how it         has operated                         over        most     of      the

last        half           century.


The administration                               proposes                 to    deal         with          the         masking            of     the
general               fund       deficit              by creating                     the         Social          Security                Integrity


2Technically                     known           as the             federal                funds         deficit.


                                                                                  2
and Debt              Reduction                  Fund.          But,         this            proposal                    doesn't             even         start

until          fiscal             year       1993         and        is     then          phased              in         over         3 years.                  Even

if      the      administration's                            budget          forecast                   is     correct,                  however,

this       delay             will         add over             $1      trillion                 in     new debt,                      raising             our
total          debt          to      about         $4 trillion--                    four         times                  the     debt         at      the

beginning                of         the     1980s.



Moreover,                I      fear        that         the     administration                             has          not         presented               a plan

that          deals            forthrightly                   with         the      fundamental                          fiscal           imbalance.

The Congressional                            Budget            Office             projections                           included             in      table         1

may represent                        a more            accurate             forecast                  of      where             our       current
policies                will         take        us.          They         indicate                  that          if         we continue                  on our

current            path,             the     general             fund         deficit                 will              actually             grow          to     $303
billion            by 1995.                   In       these         CBO projections,                                   the         national          debt
rises          by over               $1.5        trillion,                 and gross                  interest                      payments           soar        to

$334          billion               by     1995.          At     that            level,              interest                  could         well          be the

largest            item             in     the      federal               budget,            having                surpassed                 defense              and
Social           Security.                    In       the     mid-1970s,                      interest                  was only                 about         $30
billion.


ACCUMULATING SOCIAL SECURITY RESERVES--

AN OPPORTUNITY TO INCREASE LONG-TERM ECONOMIC GROWTH



As you           know,              under          the       current             financing                   plan             for      the        Social

Security                cash         benefits                programs,                 trust          fund              revenues               are
substantially                        greater             than        needed             to      meet          current                  benefit


                                                                                   3
payments.                     This         situation                   is    likely              to     continue                    for      about            the

next       40 years.                       Over             that      period,                the       balance                in      the     Social

Security                 trust        fund             could           increase               from            a little                more        than          $160

billion             today            to         something                 like          $12        trillion                  in     2030.


Last       year,              Senator                 Moynihan              asked            us to            review               this      financing

plan       and           to      report               our      views         about             it,       focusing                   particularly                      on

the       implications                          of      the        plan      for            federal            budget               policy         and          the
long-run                 health            of         the      economy.                     We gave            him           our      analysis                just

about             1 year           ago.



In     our         report,            we noted                     that          the        baby       boom          generation                   will          begin

retiring                 in      about               2010      and that,                    beginning                   then,         the     burden                 of
supporting                    this             nation's              aged         would              increase                significantly.

Whereas              today           some             3.3      workers                 support           each            Social             Security
beneficiary,                       by 2030                  each       beneficiary                     will             be supported                     by     only

2 workers.



The       impact              of     this             higher           burden               on the            welfare               of      tomorrow's
workers              depends                   largely             on the              behavior               of        our        economy          between

now and              then.                If         our      economy             does         not       grow,               or     grows         only          very
little,              higher               future              burdens             can        be borne                   by        tomorrow's              workers
only         if      they          are          willing              to     accept             a lower                  standard             of     living

than         today's               workers                  enjoy.               In     contrast,                  if         we adopt            policies
today             that        help             our         economy          experience                   steady                   and sustained




                                                                                        4
growth          over           the       next           several               decades,                future               workers                  can bear            the

heavier          burden                and          still           experience                     rising               living           standards.


We reported                    that           increasing                   our          national                  savings               rate         may be the
single          most             important                   step      we can                take           if      we want              to         promote

sustained              and steady                       growth              in         future         living               standards.                       And we

emphasized                 that          the          single           most             important                   step         we can              take        today
to     increase                  national                   savings           is        to deal                  with      our          federal             budget

deficit.


If     we were             able            finally              to     balance                  the         federal              budget,              our

savings             rate          would             be significantly                               higher               than       it      has        been         in

recent          years,               but       it           would         still             remain               low      in     comparison                  to     the

savings             rates            of many of                     our           international                         competitors.                        In     this
regard,             the          scheduled                   buildup               of       large           Social             Security               reserves
provides             us with                  a unique                opportunity                     to           further              increase             our

savings             rate          and reduce                    the         gap between                          us and our                competitors.
But      we can            take            advantage                  of      this           opportunity                       only           if     we manage
the      rest        of          our       budget              intelligently.



In     particular,                      the         surpluses                     in    the        Social               Security                   account        will
help        us deal               with         future               burdens                 only       if          they         represent               net

additions                 to      savings.                     These          surpluses                     will          not     help              us deal         with
the        future           if         they         serve           merely              as an excuse                        to    avoid              making

other        budget               deficit                   reductions.




                                                                                        5
In    our     report           to        Senator           Moynihan,               we concluded                      that      the-

scheduled             Social             Security              surpluses            represented                      an appropriate

fiscal        policy           for        the       199Os,           as long            as they            represented                     a new

source        of      national              savings.                 We cautioned                   against             accumulating

these       large          Social           Security              reserves,              however,               if      they          merely

represented                an excuse                for        inattention               to        the     deficit             problems
elsewhere             in     our         federal           budget.



THE ILLUSION                 OF CURRENT BUDGET POLICY



We share             Senator             Moynihan's               concern           that           under        the         current             Gramm-

Rudman-Hollings                      process,              the       growing            Social            Security              surpluses

are       serving          more          as a substitute                     for        other        deficit                reduction
actions            than      as a net               addition            to     national                  savings.              Under            Gramm-

Rudman-Hollings,                         deficit           reduction               is    focused               on the             total

deficit.              As you             know,       that         measure           represents                  the         combination                 of

the       Social          Security              surplus           and the           deficit               in    the         rest          of    the
budget.              In    fact,           in      the     fiscal        year           just        ended,            the       reported

total       deficit            of        $152       billion            represented                  the        combination                     of   a
deficit         of        $275       billion              in     the    general            fund,           offset            by surpluses
of      $52 billion                 in    Social           Security            and $71 billion                          in      all        the

other        trust         funds.


By helping                us to          meet       the        Gramm-Rudman-Hollings                                 targets,              rising

Social        Security               surpluses                 are     allowing            us to           avoid            the       steps
necessary             to     make substantial                          progress               in    dealing             with          the

                                                                         6
general          fund         deficit.                 Virtually               all          of     the        progress              we appear              to

have      made in             dealing            with         our        budget             deficit             can be traced                      to
increasing               surpluses               in     Social            Security--and,                            to     a lesser

extent,          in      other          trust          fund         accounts.


Last      year         we proposed                 restructuring                       the         federal               budget          accounts

to     depict          more       clearly              the        various            important                  fiscal         relationships
within          the      budget.                Specifically,                      we recommended                          maintaining                   the

unified          budget           concept              but        separating                     the     unified            budget            into        six

constituent                 parts:              into         general,              trust,               and enterprise                       funds,
with      each         of       these         subdivided                 to     distinguish                     between             operating

and capital                 activities.3                      Such        a change                 would            provide           full

disclosure               of      the      government's                    financial                     operations             while
retaining              the       discipline                  of     presenting                    the      combined            effect              of     all

government               activities                on the            Treasury's                        cash     financing                needs.

The government's                         financial                results            for          fiscal            year      1988           are
presented              using           this       format            in    table             2 at         the        end of          my

statement.


From a budget                    disclosure                  standpoint,                    the         six-part            budget            would
highlight              the       extent           to     which           deficit                 reduction               activities                deal
with      the         deficit            in     the      general               fund.              As we proposed                      to      the
National              Economic            Commission,                    for       example,                   the     Gramm-Rudman-
Hollings              targets            could         then         be revised                    to     focus           on both             the        pace


3Managing   the Cost of Government:    Proposals                                                                for        Reforming
Federal   Budgeting  Practices (GAO/AFMD-90-1,                                                                 Oct.        1989).

                                                                               7
at     which     the      budget           is      to      be balanced                   and the          extent             to     which             the
proper         balance        is        stuck          between           current                consumption                and capital

investment.               This          should           help        us make the                  tough        choices

necessary           to    bring           the      general             fund           deficit          under         control.



We are         pleased        that         the         Office          of        Management             and Budget

acknowledges               the      merit          of      an alternative                        budget        presentation
such      as this.           While           not         the        official              presentation,                    this          year's

budget         submission               shows           how the           fiscal           year        1991         budget          estimates

look      when displayed                    in     our         six-part               format.



ENDING THE ILLUSION



As long         as the           rising           Social            Security              surplus            allows          us to              avoid
dealing         with       the      general              fund         deficit,             we are            not      taking             full
advantage           of     the      potential                  to     add        to     national             savings.               If          we do

not      use    the      accumulating                    Social             Security             reserves             to     increase                 our
national           savings          rate,          we will              be in           no better             position               to meet

our      obligations               to     future           retirees                than         we would            be if          we had
remained           under         pay-as-you-go                      financing               and were               forced          to      reduce

the      general         fund       deficit              through                other      means.


The current              Social           Security               financing                plan        requires             workers               to

pay      a higher          payroll               tax     than         would           be necessary                  under          a pay-as-
you-go         system.             They          are      left        with         the      impression                that         this          tax
 is    being       used      to     build              reserves             to     help         pay    for         their          future


                                                                            8
benefits.                   We urge            the         Congress            to       take           the        steps          necessary                 to

ensure          that         this          reserve            accumulation                      has        real           economic              meaning.


If      such      steps            are       not       taken,            we are           using              this         revenue             to

finance           other            general             fund         expenditures--expenditures                                             that           we
seem to           be unwilling                        to     ask     taxpayers                  to       pay        for         explicitly.                     In
this        case,           the      growing               reserve           is        merely            an illusion.



We must           end this                  illusion.                We must              restore                 honesty            to       the

budget           debate.               We must               deal        forthrightly                        with         our      fiscal
imbalances.                    We must                face      the       facts.



As I noted                  earlier,               the       CBO baseline                      projects                an increase                    of       $1.5

trillion               in    our         national             debt        by          1995.            Simply             returning                  to    pay-
as-you-go               involves               potential                 revenue               losses             of      about           $60        billion
a year.             We would                 be very            concerned                 if          such        a change                were        made in

the        absence           of       additional                and offsetting                            spending                reductions                   or

revenue           increases.                       Without            these            additional                   actions,               we could
add another                  $300           billion           to      this            qrowing             debt         burden,             running              the

total           up close              to     $5 trillion.


Unless           the        deficit            problem              is    solved,                it       will         hamstring                   the

government's                      ability             to     achieve           vital            policy              goals:           it       will         make
 it     very      difficult                   to      begin         addressing                  the          nation's               unmet            needs;

and        it    could            sap our             long-run            economic                    vitality.


                                                                                  9
To solve        our     fiscal     imbalance,           our         political           leadership        needs     to

negotiate         a multiyear,          politically                 sustainable           budget       strategy.

We hope        that     Senator      Moynihan's              proposal           will     provide       the

catalyst        to     compel     action.



This       concludes       my statement,              Mr.     Chairman.                I would       be happy      to

answer       any questions           you    might           have.




                                                             10
                                                                                                                                          x
    Table It         Masking themderal    Deficits                                                                                        2
                     With Trust Funds

                                                                                      I
                                             Actual            Actual        Actual       Estimate       Estimate   Estimate   Estimate
    Billions       of Dollars               EY 1985           A? 1986       FY 1989       RI1990         FY 1991    FY 1993    Fy 1995
                                                                                      I
    Revenues                                   734             769              991          1,067        1,137     1,277       1,438
    outlays                                    946             990           1,143           1,205        1,275     1,418       1,555


    !!&tal     Deficit                       -212             -221            -152            -138         -138      -141        -118


    Federal Funds Deficit                    -267             -283            -275            -270         -273      -297        -303
    Trust  Fund Surpluses:
E     Social Security                               9           17              52                  66       74        98         128
      Other Trust Funds                         45              45              71                  66       62        59          57


    Subtotal,
    Trust  Fund Surpluses                       54              62             123                 132      136       157         185


    'Ibtal     Deficit                       -212             -221            -152            -138         -138       -141       -118


    SOUTXX:        EY 1985 and 1986-+MB's Special Analysis for FY 1987 and 1988
                   FY 1989~XMB's     Budget for FY 1991
                   Other Years--CBO's     Economic and Budget Outlook, January 1990


    Note:       Totals   may not add due to roundinq
ATTACHMENT                                                                                              ATTACHMENT

Table 2:     Fiscal   Year             1988    Budget Results
Restructured     According              to    GAO Proposal


Dollars      in    billions

                                                         Total         General             Trust        Enterprise
Operating         surplus/deficit(-)                     $-I31         $-248               $124           $     -7

Capital      financing         requirements                 -24             -23                   2             -3

Unified    budget         financing
   requirements                                          s-155         S-271               $126           $-1o


NOTE:       With the exception                of   the    $155    billion         total,      the     amounts        are
            approximations.




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