Defense and the Shrinking Surplus

Oct. 1, 2001

In June, President Bush sent Congress his amended defense budget for the coming fiscal year. It asked for $18.4 billion more than the placeholder defense proposal he had inherited from the Clinton Administration.

The Bush budget gives the military a seven percent increase, adjusted for inflation. Even so, and as acknowledged by almost everybody, it is not enough to keep the armed forces from slipping further into decline after a decade of underfunding and neglect. The White House budget office called it the “first installment of the President’s national defense rebuilding program.”

Amazingly, the budget debate now pivots on a phony issue–unfounded fear that Social Security “reserves” are in danger–that threatens to cut off the defense recovery before it gets started.

In late July, word leaked out that the federal budget surplus would be less than predicted just a few months earlier. Speculation arose that the $18.4 billion defense increase might have to be curtailed.

Sure enough, we learned in August, the surplus had fallen about 40 percent from the level estimated in April and May. The revised estimate was still more than $150 billion a year, but it was attributable almost entirely to revenues from Social Security.

At that point, the budget debate took a bogus turn.

Bush’s political foes accused the Administration of setting up a raid on the Social Security trust fund to pay for defense and other expenses in 2002. The White House, passing up a simple and direct answer for a less relevant one, said there is plenty of money without raiding Social Security.

In fact and by law, the Social Security trust fund does not hold cash reserves, and never has. If there is a surplus after the current year’s Social Security benefits are paid, it goes into the general fund in return for government IOUs.

All tax revenues, including those from Social Security, are spent every year. The only variable is on what.

When the regular, non­Social Security part of the budget is in balance or in surplus, Treasury will use any Social Security revenue it gets to pay down the national debt. When the main part of the budget is in deficit, Treasury has traditionally filled the gap with (a) money received from Social Security if there is any, or (b) from the sale of government bonds if there isn’t.

In 33 of the past 35 years, the regular budget was in deficit. In 25 of those years, the deficit was offset by a Social Security surplus. The fabled “balanced budget” of 1969, for example, was in balance only when the Social Security surplus was counted.

Sometimes the Social Security program is in deficit. If so, Treasury covers the difference from general funds. This has happened eight times in the past 35 years.

The Social Security surplus has been called, correctly, “an accounting fiction.” Its imputed inviolability was invented after the economic boom generated a surplus in the regular budget in 1999, more than sufficient for that year’s spending.

Democratic political strategists seized the opportunity to float the idea of a “lock box” that would supposedly preserve the Social Security trust funds. Both parties subsequently agreed that revenues from that source could be used to pay down the national debt but not for current operations. Bush did his part by promising to use Social Security funds only “in case of an economic recession or war.”

The regular budget surplus soon melted. The leading reason, ironically, was the crash of the previously booming economy. The second biggest factor was the tax cut, but neither party wanted to roll that back.

The usual and sensible solution-using some of the large total surplus remaining to fund expenses–is, by agreement, unavailable. It is kept that way by politicians who stir up fears of a “raid” on Social Security.

Secretary of Defense Donald Rumsfeld has told Congress that “every nickel” of the $18.4 billion increase is necessary and the White House is standing firm on its budget proposal.

It will be a hard fight, and if the proposal survives uncut, the perception may be that defense has gotten its fair share and the problems are fixed. Administration officials feed this misconception by proclaiming repeatedly that this is the biggest defense increase since the Reagan buildup of the 1980s.

That is true, but the bar was not set very high. Between 1985 and 1998, the enacted defense budget, adjusted for inflation, declined for 13 years in a row. In actuality, the proposed defense increase for 2002 is about half of what the Department of Defense needed and reportedly asked for. The recovery is not yet in hand.

The armed forces are operating old equipment that is wearing out, base facilities are dilapidated, stocks of spare parts and munitions are low, and the backlog of maintenance and repair keeps getting worse. The services have been encouraged to innovate and save, but they cannot save themselves out of a hole this deep.

Rumsfeld has told Congress that just to hold the line–making no improvements, but not falling any further behind–the 2003 defense budget will need another increase about the size of the one proposed for 2002. Any progress on the much-touted transformation of the armed forces to meet the needs of the coming century would be at extra cost.

We ought to be worrying about that, not about some mythical raid on the Social Security trust fund.