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Acquiring Financial Assets to Fund Future Entitlements 1 (June 2003)

handle is hein.congrec/cbo10166 and id is 1 raw text is: LONG-RA CBO F ISCAL POLICY BRIEF A series of issue summaries from the Congressional Budget Office NO. 8, JUNE 16, 2003 Acquiring Financial Assets to Fund Future Entitlements Spending on Social Security and other federal entitlement programs is expected to grow rapidly over the coming de- cades. In financing those programs, the federal government largely follows a pay-as-you-go approach: it uses its current receipts to pay current benefits. Continuing that approach implies that either future taxes will have to be raised or spending promises curtailed. In contrast, private pension plans generally fund future obligations by investing their resources in private securities and other financial assets. Some observers have suggested that the government could avoid the difficult choices of raising taxes or curtailing ben- efits by adopting the same practice. Such a practice envisions having the current generation of workers fund more of its own federal entitlement benefits, and, by boosting saving, increasing the size of the future economy from which the benefits will be drawn. However, economic and practical obstacles exist. First, the government is currently dissaving by running budget deficits, and continued borrowing to cover them could crowd out private investment. If the government used some of its current receipts to buy financial assets, it would simply have to borrow more to meet its other obligations. Its acquisition of financial assets would not have added new money to the nation's pool of investment resources. With- out that addition, economic growth would not likely be affected. Thus, in the long run, there would be little to dis- tinguish buying and eventually selling off stored up securi- ties from raising future taxes. Second, even if the government had surplus receipts to in- vest, it is doubtful that a process to protect them would be sustainable. A future Congress, confronted by war, reces- sion, or other urgencies, could spend the invested resources or could run larger budget deficits or smaller surpluses that offset the effect of boosting saving. No trust fund, lockbox, or other accounting device has yet proved effective in pro- tecting funds that have been set aside for future commit- ments from the fiscal demands that arise from one Con- gress to the next. Moreover, even if the government could run surpluses and devise an effective means to save them, the issue of having the government own private businesses would remain. Government ownership of stocks could affect corporate decisionmaking, interfere with the nation's competitive market system, and impede the efficient operation of finan- cial markets-potentially limiting economic growth. The Benefits of Greater National Saving The looming increase in entitlement spending will not be a temporary phenomenon but one that could affect future generations indefinitely. Under current projections, the number of people age 65 or older will nearly double be- tween 2000 and 2030, and the ratio of workers to people age 65 or older will drop from 4.3:1 to 2.6:1.' (By 2075, the ratio will drop to 2.1:1.) To a large extent, the goods and services that society will consume in 2030 will have to be produced then, and with the demographic shift, greater demands will be imposed on the nation's workers. A larger base of production would make meeting those demands easier. The nation's investment resources and the economy's long-term capacity would increase if society consumed less and saved more. However, the government's purchasing of private securities and other financial assets would not, by itself, accomplish those goals. The federal government does not have surplus receipts to invest today, and if the govern- ment's acquisition of financial assets was financed with more federal borrowing, the only obvious result would be a reshuffling of the financial portfolios of the government and the private sector. 1. See Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003).

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