- The Washington Times - Wednesday, September 6, 2000

For the last two years, Congress has balanced the budget without relying on the Social Security surplus something that hasn't been done since 1960.

With the budget not counting Social Security now projected to be in surplus every year for the foreseeable future the question is what to do with the extra money, as much as $2.2 trillion over the next 10 years. Some, like President Clinton and Vice President Gore, are proposing to spend virtually all of this non-Social Security surplus on various government programs. Others are proposing to refund it to taxpayers, or use it to pay down the public debt.

By definition, a surplus is what is left after Congress and the president have decided on funding levels for the nation's priorities. Education, prescription-drug benefits, and national defense are the kinds of priorities that can and should be funded long before we ever get to the surplus.

Just as you would expect your local department store to refund your money if it overcharged you on a purchase not think up ways to spend the windfall the federal government should refund what it overcharged American taxpayers. Tax relief and debt repayment are the only appropriate uses of the surplus.

The good news is, the debt held by the public has been cut by more than $360 billion during the last three years. It will be reduced another $251 billion next year. If current trends continue, by the end of the decade, it could be 75 percent lower than it was in 1999. (Economists tell us publicly held debt, which is falling, is the relevant measure when considering the impact of the debt on the economy; however, debt owed to government accounts is still rising.)

The reduced debt is the result of Congress' decision two years ago to avoid tapping the other surplus the Social Security surplus to pay for the day-to-day operations of government. Of course, the best way to put the Social Security surplus off limits is to deposit it into individual accounts under each American worker's control. However, since there is not yet a consensus to do that, the next best approach, according to economists, is to use it to pay down the public debt. (A third alternative would be to reduce the payroll tax and bring Social Security revenues into line with benefits until the additional money is needed to implement consensus Social Security reform.)

The Congressional Budget Office estimates that we can continue to pay off the public debt until about 2007; but that, surprisingly, it may be difficult to pay down too much more beyond that. For one thing, people holding a piece of that debt for example, in 30-year government bonds may not be willing to sell it back to the government, at least not without some additional incentives (representing costs to the federal government).

Too much debt reduction could also make it harder for the Federal Reserve to make monetary policy, which it does by buying and selling government debt. Without government debt to buy, the Fed could turn to private securities, meaning that a federal agency could hold an ownership stake in a large number of private firms. Without Treasury bonds to set benchmark interest rates, it could be difficult for the bond market to accurately price corporate and other debt. And since other countries use U.S. government debt to back their own currencies, the lack of debt for them to acquire could reduce the value of the dollar and raise some interest rates.

That is not to say that we shouldn't pay down the debt, but that we need to consider how far to pay it down. The fact is, if we just continue to apply the Social Security surplus to debt reduction, we will probably be doing as much as is appropriate to reduce the public debt. The key to solving some of the biggest problems looming on the nation's horizon for example, making sure Social Security is there for the baby boom generation, and providing health care and prescription-drug coverage to those who need it is not necessarily more debt reduction, but a healthy and growing economy. After all, it is the booming economy that has flooded the Treasury's coffers with excess revenue, leading to the annual surpluses we now enjoy.

With interest on the remaining debt relatively low, the benefits of economic growth spurred by tax relief would actually be a net plus for the Treasury. Think of a family. If a couple with a 7 percent mortgage inherited $50,000 from a favorite aunt, would they be better off investing the windfall in a mutual fund yielding 10 to 15 percent a year, or paying down their 7 percent mortgage? The answer is obvious. Refunding the excess to taxpayers would prevent Washington from squandering it on low-priority government programs, while also providing the economy additional capital to prolong the economic expansion. Remember, the tax cuts implemented during the Reagan years when the budget was in deficit led to the creation of 41 million jobs since 1982, 18 years of nearly uninterrupted economic growth and billions in extra revenue to the Treasury.

The bottom line is, federal surpluses exist because taxpayers have overpaid. Given that the public debt is already being substantially reduced by the Social Security surplus, the best use of the non-Social Security surplus is to return it to the American people whose ingenuity and hard work created it.

Sen. Jon Kyl is an Arizona Republican.

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