Response to Mr. Hart

[National Dialogue Moderator <moderator>]

Thank you for your question.

I agree that Social Security should move towards advance funding.
In a previous message, I outlined some of the practical limitations
on moving towards full funding.  The bill I negotiated has 2%
accounts from personal accounts, with some extra funding for
low-income beneficiary balances from general revenues.  I personally
would be comfortable with a greater degree of advance funding than
this.

The role of general revenues can exist in a variety of forms.
Under current law, enormous general revenues will be required
beginning in the year 2014.  General revenues could also be used
(especially in a time where an on-budget surplus exists) to fund
personal accounts.  It is worth noting that the general revenues
required simply to redeem the Trust Fund are so enormous that these
costs often dwarf personal account investment costs, even in some
proposals that use general revenues to create larger accounts.
One way or the other, a tremendous amount of this system will be
funded through progressive income taxes.  Under President Clinton's
proposal, which did not include personal accounts within Social
Security itself, general revenues would be relied on exclusively
to fund all cost increases in the system from 2014 through 2055 --
huge general revenue outlays, the equivalent of hiking the payroll
tax by another five points.

In last year's Gregg-Breaux-Kolbe-Stenholm proposal, we required
ourselves to work wholly within the 12.4% payroll tax rate, and to
balance the system within that rate, including the personal accounts,
with no new dedicated general revenue infusions.  We were proud of
that bill, but we learned a few things from it.  Among them:

1) By doing so, we kept total costs of the system at no higher than
14% at any point, even at the peak of the Trust Fund "drawdown."
Assuming that most of the political community  opposed tax increases,
we felt that other reformers would endeavor to meet that standard
as well.  Then a funny thing happened.  Every other plan that was
offered rose in cost at some point near the current-law tax rate
in 2030 of approximately 18%, either by simply using general revenues
to fund the current system, or by using them to create "add-on"
personal accounts.  In other words, no other proposal other than
the Moynihan-Kerrey proposal moved in our direction of working
entirely within the current payroll tax system and holding costs
down.

2) By working entirely within the payroll tax rate, this forced us
to focus most of the transition costs on the benefit side before
2030.  While we felt that our calculations showed that individuals
would still do better under our plan than under current law, we
did not have the opportunity to spread the transition cost over a
longer period and a larger group of birth cohorts as would have
been the case if we permitted some new revenue into the system.

3) When we started drafting our proposal, there was no projected
on-budget surplus.  Last year, there were improved projections of
surpluses stretching over the next several years, which members of
Congress were lining up to "spend" in some form.  Clearly, if some
of that money could be used to advance-fund future Social Security
benefits, we had an opportunity to effect a transition that would
not require an immediate increase in taxes or borrowing.

This year, therefore, we had to review our previous decision not
to employ general revenues.

We were still highly concerned about spending "projected" surplus
revenues that may or may not come to pass.  We did not want to
develop a proposal that would commit general revenues for an infinite
time.  Nor did we want to run the risk of committing resources that
might not, despite optimistic projections this year, turn out to
be there.

We therefore resolved to use some general revenues in order to make
the transition smoother and permit higher benefits, but we imposed
one condition upon ourselves.  We would not allocate general revenues
that our plan would not itself cause to materialize.  We received
an estimate from CBO of the effect of our plan upon general revenues,
and decided that this amount should be refunded to taxpayers through
Social Security benefits.  We incorporated those general revenues
into our plan, and thus, effectively, we have committeed some
general revenues to meeting the cost of transition that we did not
before.

In short, I do not believe that we should rule out using some
general revenues to finance a transition, but I would stipulate
that this should only be done in a way that explicitly and directly
offsets future liabilities, and does not become a means of avoiding
tough choices.  For example, our proposal moves part of the OASDI
tax into personal accounts, instead of using that money to build
up unfunded liabilities in the Trust Fund.  I would oppose simply
creating personal accounts from general revenues while permitting
the Trust Fund liabilities to build up as under current law; then
we would simply have added a new set of obligations to our current
ones.

I am, I would repeat, open to using general revenues as part of a
plan that reduces the amount of general revenues that people are
obliged to pour into the system in the year 2030, which is, under
current law, a crushing burden.  I fear that Congress might instead
employ them to create liabilities instead of funding the current
ones, and for that reason I am careful to study the exact implications
of every plan to commit general revenues in this way.


	Senator Judd Gregg