ONE of the ongoing debates about the American economy is whether the United States will start to see a revival in national savings. Some economists contend that the US will indeed witness an abundance of savings in the next decade because of demographic changes and social security surpluses. From an economic perspective, it doesn't matter much who saves, the government or individuals.
Savings means more investment and exports, and less consumption and imports. As the supply of savings expands, interest rates fall, investment is encouraged, productivity takes off, and with more goods and services available, everyone's living standard rises.
The aging of America is the critical demographic feature of the US economy today. The dominant 77 million baby-boomers - now in the rapidly growing 25-to-45 age group - will be moving into the 45-to-64 age group in the 1990s. Under the 1983 social security reforms, the system is expected to accumulate massive reserves while these baby-boomers work and save, which will later decline as they retire and begin to draw down.
What is truly astounding is social security's contribution to this positive news. Viewed as a fiscally sick system just a few years ago, it is now the country's best weapon against the deficit.
As a result of the 1983 social security reforms, huge and rapidly growing surpluses are projected over the next 25 years. Although social security is officially an ``off-budget'' item, the surpluses reduce the need for federal government borrowing to finance its deficits. That is because social security's figures are included in the total budget deficit that Congress must reduce under the Gramm-Rudman-Hollings legislation. The projected surpluses are so massive that they could actually eliminate budget deficits and wipe out the entire national debt.
At the end of last year, the social security surplus amounted to $109 billion. Conservative projections show the surplus reaching $1.4 trillion in the year 2000, and climbing steadily to a peak of $12 trillion by the year 2025 before shrinking again as baby-boom retirement benefits begin to exceed receipts. By comparison, the total federal public debt now stands at around $2.5 trillion. Under such a scenario, the Treasury bond market will effectively disappear and interest rates would plummet because the social security trust funds by law can only invest in government securities.
The rising social security surpluses are already helping Congress meet its Gramm-Rudman budget deficit reduction targets. The Congressional Budget Office estimates that after reducing the total budget deficit by $39 billion in 1988, social security surpluses will provide $46 billion of savings in 1989. Five years from now, such savings are expected to be $117 billion. By fiscal 1993, the overall budget deficit is projected to $122 billion, yet all of the improvement is accounted for by the growth in social security surpluses; excluding social security, the deficit remains well above $200 billion for the entire five-year period.
The social security projections are based on reasonable demographic and economic assumptions.
A legitimate concern is that the insatiable appetite for government spending and the growing weight of interest payments on the budget would make it irresistible for Congress to raid the social security surpluses. Chronic surpluses could also lead to pressures to reduce contributions or to increase benefits.
Assuming the social security reforms continue and Congress doesn't raid the surplus - a big if - and assuming an appropriate monetary policy is pursued, the impact on the economy would be highly positive. Over time, the social security surpluses would gradually overcome the deficits in the rest of the government budget, producing overall surpluses. In 10 years, the US could revert to its prior status as a creditor nation, becoming the Japan of the 21st century - a net saver and a net exporter of capital. The counterpart to this would be a gradual swing to a large trade surplus.
There is a catch, of course. Politicians may not realize this is one time when they ought to leave well enough alone - and let the growing social security surplus cure the federal deficit.