Re: Hart on Unfunded Liabilities and General Revenues

[National Dialogue Moderator <moderator>]

      Re: Hart on Unfunded Liabilities and General Revenues

Your observation about people not wanting to discuss general-revenue 
financing is interesting--same thing goes for debt financing.  I've seen this 
same reluctance, and it's gotten much worse this year, since the State of the 
Union Address.

Some of this has to do with a traditional concern (identified with 
Congressional Republicans but shared by many others) about putting the mighty 
social security program in a position of having a claim on general 
revenues--or the rest of the budget.  Members of Congress have breached 
payroll-tax financing only infrequently, as when they began taxing benefits 
and diverting the revenues to the trust funds.  The pro's and con's of 
general-revenue financing used to be discussed openly and vigorously.  
Reluctance to discuss the issue now seems to be driven, at least in part, by 
a feeling that the line between "funding the transition" with general 
revenues and using general revenues as a new revenue source for the trust 
funds--to help pay future benefits--can not be made sharply enough to be 
communicated effectively.  The distinction is enormously important.  
Proposals to move toward personal accounts frequently rely on general 
revenues (or debt finance) to help fund the transition.  The liability is 
fixed--and by nature of being transitional--declines and goes away.  Other 
proposals, most notable the President's and the Archer-Shaw proposal--which 
Bob Reischauer keeps mentioning for reasons that are not clear to me--use 
general revenues to pay benefits.  General-revenue financing in these cases 
involves giving social security a permanent (and large and potentially 
growing!) claim on the rest of the budget.  Admittedly, these are difficult 
issues to communicate effectively with a broad audience.  

The reluctance to discuss debt is more worrisome to me since it is the only 
way to really understand how social security works and what the "transition" 
means.  To think clearly about social security, you have to face up to the 
fact that social security's unfunded liability is an off-the-books or 
implicit debt of the federal government.  It happens to dwarf the public debt 
outstanding.  Off-the-books and implicit doesn't change the fact that the 
government has accepted trillions of dollars of taxes from workers and issued 
them explicit promises (backed implicit IOUs not explicit debt instruments) 
of future benefit payments.  Divert part of the tax to personal accounts for 
investment and you break the debt-formation process.  New taxes that would 
have generated new unfunded promises and new implicit debt goes instead into 
capital investment.  Issuing formal debt in the full amount of the unfunded 
liability would have real economic effects only to the extent capital markets 
expected Congress to renege on a portion of those promises.


Carolyn Weaver