NEW YORK — The 1990s mantra of debt reduction is being oversold as a solution to Social Security when it’s really nothing of the sort, according to June O’Neill, director of the Congressional Budget Office from 1995 to 1999. It’s not every day that a hands-on budget expert stops by for lunch and a chat. So it was a real treat to have an opportunity to talk with O’Neill, who is the director of the Center of Business and Government at Baruch College and the Graduate Center, City University of New York.
”I think debt reduction has been oversold,” she said. “Although I must say that when I was at CBO I was probably one of the contributors to overselling it, because at the time it wasn’t really envisioned that the surplus would be as large as it ended up being.”
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
O’Neill thinks that debt reduction is being accepted as an end in itself instead of serving as a jumping-off point for a national debate.
”It’s taken on a holy aspect,” she says. “It goes way beyond what we know about the relationship between debt and growth. The empirical evidence on that is very poor.”
What she finds particularly annoying is the way debt reduction is being sold – “as a way of saving Social Security when there is no direct link between reducing the debt and saving Social Security,” she says. “Interest payments will be smaller, but those are up for grabs. There is no way of dedicating that amount to Social Security when the time comes.”
No Nirvana
To claim that debt reduction is a wonderful way to ensure prosperity ignores the history of the U.S., which prospered in spite of large debt.
Meanwhile, nothing is being done to improve the long-run problem of Social Security, as fewer workers support a growing army of retirees.
”It’s even harmful to be talking about debt reduction as a way of saving Social Security,” O’Neill says. “It really obscures the long-term structural problems in the Social Security system and deters real reform.”
One constructive use of the surplus would be to reduce payroll taxes and use the funds to convert the system to partially privatized accounts.
Another alternative would be to use the surplus to cut marginal tax rates and correct the distortions that have crept back into the tax code since the 1986 tax reform legislation. Without it, “effective tax rates will continue to rise as real income increases, boosted by productivity gains,” O’Neill said.
Bracket Creep
Income tax brackets are indexed for inflation but not for real wage growth. Without that adjustment, higher real income drives people into a higher tax bracket, increasing the share of taxes to GDP, which is already at a post-war high of 20.6 percent.
What’s more, paring the federal government’s take would shift some popular spending programs, such as education, to the state and local level, “where the money can be better spent,” she said.
The best argument for cutting taxes, O’Neill says, is the likelihood that the surplus will be spent.
”Because it’s there, it will get spent,” says O’Neill, stressing that existence determines outcome.
While the economic good times haven’t advanced the debate on a Social Security fix, there is even less of an urgency to reform Medicare, the government’s medical-care program for seniors.
In fact, the current Medicare debate centers on how to expand it by adding a prescription drug benefit.
The experience with cost estimates is not encouraging on that score.
Medicare Mistakes
“We have always underestimated what the real costs are of anything having to do with Medicare,” O’Neill says. “It’s a completely antiquated beast.”
O’Neill has watched first-hand as 535 members of Congress made decisions on who should get paid for what. Last year, a blue Ribbon Medicare reform panel, under the chairmanship of Louisiana Democratic Senator John Breaux, proposed moving Medicare from a defined benefit program to a defined contribution system. President Clinton backed away in favor of his own proposal.
Alas, if government hasn’t made any progress in reforming these programs, which are certain to put huge drains on the economy in the future, what’s going to happen in the next recession, when the surplus is up for grabs?
For that reason, O’Neill urges caution on any disposition of the surplus.
”I would not give the store away,” she says. “The surpluses seem pretty solid. So did the deficits in the early 1990s.”
