- The Washington Times - Monday, January 5, 2004

Even liberal newspapers have been reporting the story of runaway federal spending with front-page headlines. During the past couple of years, we have seen the most rapid increase in federal spending since the Great Society. In 2003, total federal spending increased 10 percent; in 2002, it increased 7.9 percent.

Recently, I proposed a Social Security reform plan that relied on a modest restraint in this wild spending growth to help finance a large personal account option for working people. The option would allow workers to shift on average 6.4 percentage points of the 12.4 percent Social Security payroll tax to their own individual investment accounts. Benefits payable from the accounts would substitute for a portion of the old Social Security benefits based on the degree to which workers exercised the account option over their careers.

The plan included four transition financing mechanisms to raise money to continue to pay current Social Security benefits in full while workers shifted about half the payroll tax to the accounts. One of these was to restrain the rate of growth of federal spending by 1 percentage point a year for just eight years. So, for example, if federal spending on the current baseline was to grow 7 percent a year for the next eight years, under this proposal it would grow only 6 percent yearly.

The other transition financing mechanisms were the short-term Social Security surpluses projected until 2008, higher corporate tax revenues resulting from investment of the money raised from the stocks and bonds sold to the personal accounts, and modest transitional borrowing later paid off from surpluses generated by the reform. Social Security’s chief Actuary officially has scored this plan as achieving full solvency for Social Security, with permanent and growing surpluses in the program.

Just before Christmas, however, what is becoming the liberal/left party line on this proposal was presented in a paper by Robert Greenstein and Richard Kogan from the Center on Budget and Policy Priorities. The last major crusade of this crowd was to argue that welfare reform with work mandates would cause widespread financial devastation among the poor.

On the modest 1 percent restraint on the growth of federal spending, Messrs. Greenstein and Kogan report such a limitation would devastate the federal government. It would require elimination of “close to half of nondefense discretionary spending outside of homeland security.” This is even farther from the truth than their line on welfare reform.

The proposed spending limitation does not require any reductions in federal spending. It just modestly reduces the rapid growth in that spending. If the federal government grows 7 percent a year for the next eight years,at that point it would be 72 percent larger than today. If under the spending growth restraint it grows only 6 percent a year, then after eight years the federal government would still be 59 percent larger, not devastated, nor cut in half.

In 2003, federal spending grew by $201 billion. The proposed spending restraint would have limited it to grow by a still way too large $180 billion. Suppose we set aside from that increase the $71 billion supplemental for the War on Terrorism. Federal spending would still have increased by 6.4 percent for the year, or $129 billion. The proposed spending restraint would still have allowed spending to increase by a still too large $109 billion.

Moreover, the proposed spending restraint is not limited to “nondefense discretionary spending outside of homeland security.” The proposal excludes Social Security and debt interest from the spending restraint. Assume no spending changes in Medicare as well since Congress just reformed that.

To meet the targeted spending restraint with those exclusions, the growth of the rest of the federal government would have to be reduced by 1.7 percentage points, a still quite modest restraint. According to the Heritage Foundation, discretionary spending increased by 12 percent in 2003 and 13 percent in 2002.

Moreover, if the spending restraint is targeted on the most wasteful spending, the growth in the rest of the budget would not have to be limited by even this much. Corporate welfare is estimated to cost at least $50 billion per year. Eliminating that alone would provide the necessary spending restraint for more than two years. Even with the War on Terror, we also still have many unneeded military bases inside the U.S. that should be closed.

The Feds also provide lavish farm subsidies that will probably have to be eliminated under international trade obligations anyway. Entitlement reform is still much needed even outside of Social Security and Medicare. Some additional low priority items could easily be delayed as well. All this adds up to much more than would be needed under the proposed spending restraint.

By relying on a modest spending restraint to help finance the transition, the proposed Social Security reform plan is a valuable vehicle for starting to get wild federal spending growth under control. Over the long run, a much stricter, permanent restraint on federal spending growth should be adopted.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation, and director of the Social Security Reform Project for the Club for Growth.

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