SPENDING BY the federal government has been growing at roughly 5 percent a year. Federal revenues have been growing almost twice as fast. The result is a budget surplus estimated at $170 billion this year — and as much as $4 trillion over the next decade.
This geyser of cash has awakened something unheard in America for generations: serious talk of erasing the nation's public debt. In a TV ad now airing in South Carolina, George W. Bush says his economic plan "reserves $2 trillion of the surplus to protect and strengthen Social Security and pay down the national debt."
During his State of the Union speech, Bill Clinton announced, to wild applause, "We are doing something that would have seemed unimaginable seven years ago. We are actually paying down the national debt. If we stay on this path, we can pay down the debt entirely in 13 years and make America debt-free for the first time since Andrew Jackson was president."
And in New Hampshire the other day, there was this from John McCain: "In town hall after town hall, people have stood up — these are working-class families that come to these town meetings — they say, 'Senator, why don't we pay down the debt? We have an obligation.' "
Do we? An obligation to service the debt, yes. But to eliminate it?
No doubt there would some measure of moral satisfaction in lightening the financial load future taxpayers will have to bear. Retiring some or all of the debt today means that our children will owe less interest on that debt tomorrow. Reducing the national debt by $100 billion next year, for example, would reduce annual interest payments by as much as $6 billion. Not a bad little benefit.
![]() Moving to a private Social Security system would provide much greater benefits to retirees than the current setup. |
But hardly the biggest bang we can get for the budget-surplus buck.
The number that matters most when assessing debt is not the dollar amount, but how big the indebtedness looms in the overall financial picture. Is a $150,000 mortgage a crushing obligation? Yes, if the borrower makes only $25,000 a year; not at all, if he makes $100,000. Likewise the national debt. In 1993, the debt stood at nearly 50 percent of GDP. Today it is closer to 35 percent. So long as Washington doesn't return to deficit spending, the burden our children inherit will keep shrinking — even if we retire none of the debt.
The faster the economy grows, the lighter the debt becomes. And there lies the key to spending the surplus. Use $100 billion to pay down debt, and the reward is $6 billion a year in interest savings. Use $100 billion to eliminate the death tax — or to cut marginal tax rates across the board — or to replace the Internal Revenue Code with a flat-rate "postcard" tax — and the reward is far greater. The right tax cuts, says Daniel Mitchell of the Heritage Foundation (to whom I am indebted for the numbers in this column), would spur an additional 10-15 percent of growth over the next decade — as much as $1 trillion of new wealth added to the US economy.
Better still, let the surplus be used to reform Social Security.
Over the next seven decades, the Social Security Administration says it will have to pay out $20 trillion more than it will take in. That is a staggering unfunded liability, six times the size of the national debt. If you're concerned about future generations, this is the debt that should keep you up at night. Treasury obligations can easily be rolled over; as old T-bills and savings bonds are paid, new ones can always be sold. But Social Security debt isn't so simple. As millions of Baby Boomers head into retirement, their pensions will have to be paid with actual dollars — dollars the government won't have. When that day comes, either Social Security will go bankrupt, or taxes will skyrocket.
The only way to prevent this train wreck is to get Social Security out of the government's hands. It should be converted from what it is now — a pay-as-you-go Ponzi scheme — into a genuine investment plan. Workers would put a portion of their earnings into private accounts that they, not Washington, would control. Because these would be real investments, with real earnings and real compounding, the rate of return would be far higher than anything Social Security offers. Employees would be able to look forward to vastly improved retirement benefits — and the government would no longer have the obligation of supporting them in old age.
Privatizing Social Security in this way has been bruited about for years. The great stumbling block was always the transition costs. During the shift from the old system to the new, who would protect current retirees and older workers? What would happen to their benefits as less and less money flowed into the Social Security Administration? Thanks to the budget surplus, it is now possible to assure them: Nothing would happen to their benefits. They would be fully protected.
Using the surplus to finance the move to a private Social Security system would pay dividends in many ways. It would boost retirement income. It would increase the national savings rate. It would end the ruinous upward creep of payroll taxes.
Over and above everything else, it would solve America's real debt crisis: the massive unfunded Social Security liability that is lurking around the corner. Paying down the national debt has an undeniable appeal. But that's not the debt that menaces our kids.
Jeff Jacoby is a columnist for The Boston Globe.
-- ## --
Follow Jeff Jacoby on X (aka Twitter).
Discuss his columns on Facebook.
Want to read something different? Sign up for "Arguable," Jeff Jacoby's free weekly email newsletter.