How to Make a Bust Out of a Bonanza
|April 3, 2002||Posted by Staff under Progress Report, The Progress Report|
Will Politicians Squander Surplus?
We’re About to Make A Bust Out of a Bonanza
by Sam Nunn and Warren Rudman
The light we see at the end of the tunnel is not an oncoming train. It is the bright future of a nation that acts with a sense of generational responsibility by turning budget deficits into surpluses and debts into savings and investment. That light is within our reach, but as Congress and the president resume work on a budget blueprint for FY ’00 and beyond, the challenge is more political than economic. In a time of projected budget surpluses, how does our nation maintain the fiscal discipline needed to build a sound economic future?
The essence of fiscal discipline is not simply balancing the books. It’s making decisions about what’s important enough for the nation to justify the taxes needed to pay for it and ensuring that the consequences of those decisions improve the standard of living for our children and grandchildren. Both history and recent political posturing indicate that our rare generational opportunity to build a sound fiscal and economic future is endangered by what may be irresistible political temptation.
Budget deficits were an unfortunate fact of life but salutary in forcing us to make tough decisions now. Budget surpluses “as far as the eye can see” offer something like immortality to politicians: a bottomless well of money for any and every purpose, without ever having to raise taxes.
Allowing this illusion of fiscal immortality to guide our actions would be a mistake not easily forgiven by future generations. Regardless of its size, a hypothetical surplus cannot alter demographic reality.
Even if recent projections prove accurate and the nation enjoys a period of prolonged surpluses, the fact remains that between now and 2040 the number of Americans age 65 and above will more than double; the number of workers paying into the system relative to the number of Social Security and Medicare beneficiaries will fall by more than a third; the cost of Social Security and Medicare as a percentage of the economy will grow by more than 70 percent; and the annual combined cash shortfall for both programs will approach $800 billion in inflation adjusted dollars.
Budget surpluses provide an opportunity to prepare for the fiscal challenge this demographic tidal wave portends. But it is all too easy to allow the mere perception of a $6 trillion surplus over the next 15 years to blind us to the challenge rather than help us face it.
The surplus is only a projection that cannot be spent. If spending is increased or taxes are cut based on the expectation of huge surpluses and the projection turns out to be wrong, deficits easily could reappear where surpluses are now forecast. Most economists therefore have advised that the best thing to do with the surplus is to either pay down the debt or to increase savings and investment through some other mechanism such as funding a new system of individually owned retirement accounts.
If the projected surpluses do develop, and if Washington can muster the will to leave them alone, the end result will be a substantial reduction in the national debt, which now stands at more than $5.6 trillion. Debt reduction will enhance net national savings, thereby freeing resources for investments in productivity, leading to stronger economic growth in the future. A stronger economy can help ease the burden on today’s preschoolers, who will find it a struggle, as they join the work force, to finance the retirement and health care costs of an increasingly older population.
But talk of huge surpluses has sparked an explosion of ideas about how they can be used to increase spending, cut taxes and avoid hard choices on Social Security and Medicare reform.
The dialogue has changed dramatically as the surplus projections have gotten rosier. Last year, President Clinton and key members of Congress seemed to be paving the way for comprehensive entitlement reform, and a consensus was developing that “hard choices” were needed to reduce the long-term cost of Social Security and Medicare. This year, leadership for long-term entitlement reform is eroding rapidly; talk has been less of hard choices and more of using general revenue surpluses to prop up the trust funds, regardless of long-term fiscal consequences.
Committing surpluses in this manner is more of an illusion than a solution. The underlying problems will remain, and if the surpluses fail to materialize, a unique opportunity to act before the crisis hits will have been squandered. Moreover, the situation will get worse if the expectation of a surplus is used to expand programs already on an unsustainable footing. Budget surpluses create a much-needed opportunity to prepare the economy for the demographic realities of the future. They must not be used as an excuse to abandon our obligation to future generations.
This new article is distributed by the Concord Coalition. Former U.S. senators Sam Nunn (D-Ga.) and Warren Rudman (R-N.H.) are co-chairmen of the Concord Coalition, a nonpartisan organization dedicated to the elimination of federal budget deficits.
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