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A Golden Opportunity for the Social Security Trust Fund

by Andrew M. Schocket on Oct 8, 2001

Andrew M. Schocket

The sudden threat to the Social Security trust fund offers unexpected opportunities to address pressing national educational and economic needs, if the president and the Congress are willing to seize them.

Prompted by projections of falling government revenues, the Bush administration and congressional leaders appear ready to eat into the Social Security surpluses. Currently, those surpluses are being used as a sinking fund (generally referred to as the Social Security trust fund) to pay down the federal debt and to ensure Social Security’s long-term solvency. Because big sinking funds are good policy, this one should be guarded, not raided.

A sinking fund is a kind of governmental savings account. When a government undertakes a project — a subway, for example — that costs more than taxpayers are willing to pay all at once, it borrows money by issuing bonds to pay the immediate costs. Then it dedicates an amount of money every year out of incoming taxes to an account that goes to repay the bonds. Doing so assures investors that they will get their money back, so they are willing to buy the bonds at low interest rates. Low bond interest rates save taxpayer dollars by keeping down the cost of repayment.

That’s exactly how the nation’s first such account operated. After the American Revolution, state governments were heavily in debt. Alexander Hamilton, George Washington’s secretary of the treasury, proposed that the federal government take on those debts, issue bonds to cover them immediately and establish a sinking fund to pay them off eventually. The existence of the fund assured wary investors that the fledgling government would be able to cover the bonds. Hamilton’s plan became one of history’s great financial success stories.

The Social Security trust fund has worked well, too. For the last several years, Social Security has been taking in more than it has been paying out, and the federal government has held onto the extra cash. That’s smart, because as the baby boomers age Social Security will run deficits and need that money. In the meantime, the government has used the fund to buy back federal bonds, thus lowering the amount the federal government must budget to pay interest on bonds and leaving more revenue for such needs as defense and social programs. 

President Bush argues that the trust fund is getting too big, and cautions against paying the federal government’s debts too quickly. Many bonds are structured so that the government must pay bondholders a bonus to buy them back before they are due. Buying bonds back early could cost taxpayers billions of dollars.

But there are other ways to use monetary nest eggs besides paying debts off early. For example, when Philadelphia built the nation’s first large municipal waterworks early in the nineteenth century, the city paid for the project by issuing bonds and establishing a sinking fund. Eventually, the fund began to take in more than it was paying out. So the city council invested the extra money in important local projects such as canals and turnpikes, making money for taxpayers while helping the city grow.

Philadelphia’s success suggests a solution to the current problem. Rather than using the Social Security trust fund to buy federal bonds before they have come due, the federal government could invest that extra money in state and municipal bond issues supporting public education.

Consider the great and lasting benefit if billions of Social Security trust fund dollars helped finance the construction, expansion and repair of public schools. Not only would doing so be a big boost for public education, but the money would return to the trust fund as the local bond issues matured. In addition, a construction project of that scope might be the shot in the arm the nation’s faltering economy needs. It would provide immediate employment in communities across the country.

This solution would be politically attractive to both parties. The president and congressional Republicans have made education and tax cuts their top priorities; Democrats have focused on preserving the federal budget surplus and protecting Social Security. By using Social Security trust fund money to help localities build schools, together the two parties could further education, spur the economy and hold down local tax rates. This would also leave Social Security intact and enable politicians on both sides of the aisle to keep their promise not to tamper with America’s most popular social program.

Using the trust fund this way could also contribute to its own protection. With trust fund money going to schools, the president and congressional Democrats could forego most of the budgetary component of the president’s bipartisan education program but still save face. It’s a deal made in politics heaven, and would keep the Social Security trust fund safe and sound.

Andrew M. Schocket is author of “Founding Corporate Power in Early National Philadelphia” and director of American Culture Studies at Bowling Green State University.