Issue Analysis 102 – Clinton’s Bait-and-Switch FY 2001 Budget Raids Social Security and Taxpayers’ Wallets

Part I

Squandering the Surplus, Threatening Medicare

Clinton’s tax cut plan returns less than 23 percent of the $746 billion surplus back to taxpayers, leaving roughly $580 billion for the administration’s other priorities. Their plan dedicates these remaining funds for spending on new entitlement programs and for buying down publicly held debt under the guise of extending Medicare’s solvency.

The budget proposes spending nearly $200 billion of surplus funds to expand Medicare and Medicaid. The Medicare provisions include a new prescription drug benefit for current recipients and a program to encourage younger retirees (pre-seniors) to buy into the program. In light of Medicare’s current finances, both of these new programs could push the program dangerously close to collapse.

Medicare is composed of two parts: Part A, the Hospital Insurance (HI) program that pays hospital bills for all seniors; and Part B, the voluntary program that pays seniors day-to-day doctor’s bills. These two programs are funded very differently. The HI trust fund is intended to be entirely financed with the revenues generated from the 2.9 percent HI payroll tax. The Medicare Part B program is mostly funded out of general tax revenues, though seniors’ premiums and co-payments cover about 22 percent of its costs.

On a cash basis, the Medicare HI Trust Fund is bankrupt even though, on paper, the program is “technically” solvent until 2015. In fact, the program has been running cash deficits since 1995. In FY 2001, HI payroll taxes are expected to generate $143.6 billion in revenues for the program, about $2 billion short of the $145.7 billion the program is expected to pay out, including administrative costs. The actuaries at the Social Security Administration, who monitor the program’s health, project that the Medicare HI program will spend $260 billion more than its tax revenues over the next 15 years.

Medicare covers these annual cash deficits with general tax revenues that it receives from “cashing-in” the IOUs (government-held bonds) it accumulated in previous years. These IOUs will be gone by 2015.

Sadly, the White House’s solution to Medicare’s financing problem is not to reform the program so that expenditures match the program’s income. Instead, Clinton’s solution is to take $235 billion of the budget surplus to buy more IOUs for the program. (Actually, the Treasury uses the money to buy down publicly held debt and Medicare is given a bond, or IOU, in exchange.) On paper, the president claims this debt-for-IOU swap will extend the life of the program through 2025. In reality, however, the president’s failure to deal with the actual cash crisis means Medicare will spend $1.4 trillion more than its income through 2025.

Clinton’s proposal to allow pre-seniors (aged 55-62) to buy into the system will likely worsen the Health Insurance fund’s cash flow problem, requiring even larger subsidies from general tax revenues. In addition, Clinton’s proposal to add a prescription drug benefit to the Medicare program, will more than likely cost far more than the $98 billion he wants to spend over 10 years.

Clinton’s Phony Social Security Solution

Clinton’s plan to create a “Social Security solvency lock-box” is no more credible than his phony Medicare solution; in fact, in many ways it is worse. Clinton’s lock-box is nothing more than a scheme to use all of Social Security’s 10-year, $2.2 trillion surplus to buy down federal debt. In exchange, Social Security gets $2.2 trillion in IOUs, which do nothing to prevent the program from running large cash deficits in the years beyond 2014.

Using Social Security’s surpluses to buy down debt is as much of a “raid” on the trust fund as it would be to use the funds to spend on pork-barrel projects, pay government workers’ salaries, or build an aircraft carrier. The bottom line is, no funds will be available to cover the cash shortfalls that will begin mounting in 14 years. While the federal debt may be lower, there will be no money in the bank to help pay those future benefits.

Indeed, analysts within Clinton’s own Office of Management and Budget have said the same thing. In the Analytical Perspectives to Clinton’s 2000 budget, they wrote:

“These balances [within the trust fund] are available to finance future benefit payments and other trust fund expenditures – but only in a bookkeeping sense. Unlike the assets of private pension plans, [government trust funds] do not consist of real economic assets that can be drawn down in the future to fund benefits.”

The Congressional Research Service has written much the same thing:

“While the trust funds have an important role in monitoring the finances of the program and maintaining its fiscal discipline, they are basically accounting devices. The federal securities they hold are not assets for the government … [they are] a form of IOU from one of its accounts to another … Those claims are not resources the government has at its disposal to pay for future Social Security claims. Simply put, the trust funds do not reflect an independent store of money for the program or the government, and taking Social Security ‘off budget’ did not change this.”

The only honest “lock-box” that would protect Social Security’s surplus from being spent on other government programs, while also creating assets that could be used to pay future benefits, is a personal retirement account owned by individual workers. Instead of using these surpluses to buy down debt and create a mountain of IOUs, Congress and the White House should instead allow current workers to divert these surplus payroll taxes into personal retirement accounts under their control.

Lost Interest Savings

Another unfortunate consequence of Clinton’s debt reduction scheme is that his budget essentially spends the interest savings that accrue by buying down government debt. Under the president’s plan, the government would save up to $650 billion in net interest payments on the debt over the next 10 years. While this is clearly a good thing, these savings should go to taxpayers as a tax cut, not to fund more government spending, as is shown in Chart 5. Clinton’s discretionary spending increases more than erase the interest saved by reducing government debt.


Close scrutiny of Clinton’s FY 2001 budget reveals that it is really an elaborate scheme to keep the mounting budget surpluses in Washington, rather than return those surpluses to the taxpayers whose hard work is producing them. Indeed, of the $2.9 trillion in total budget surpluses the White House projects over the next decade, Clinton would return just $169 billion, equal to about six cents out of every surplus tax dollar.

Worse, however, Clinton raids the Social Security surplus to buy down government debt, leaving a pile of IOUs in exchange. While paying down the government debt may sound good to most Americans, it should not be confused with protecting the “solvency” of Social Security. Under Clinton’s plan, buying down debt is no different than wasting the money on ridiculous pork-barrel projects; the funds will not be there when Social Security begins running large deficits in 14 years.

The antidote to Clinton’s budget is meaningful tax cuts for every American and implementing personal retirement accounts that every worker can call their own.

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