Americans on the Federal Budget

(Sept. 2000)

Allocating the Surplus

Procedure
The projected tax surplus has been a major issue in this presidential election year, with the candidates’ different plans for its use vying for attention. Polling on the subject has been extensive, but these polls have not been structured to show how the public might distribute surplus funds among the many possible uses that have various degrees of support.

The COPA/Knowledge Networks poll gave respondents the following information:

As you may know, this year the federal government received in taxes approximately $224 billion more than it spent. This is equal to about $486 for the average taxpayer. Of this money, $325 is actually money that is from payroll taxes and is meant for Social Security; another $52 is from payroll taxes meant for Medicare; while $109 is from all other federal taxes, mostly income taxes, and is meant for general spending.

First, I would like to know what you want to do with the surplus that comes mostly from income taxes. Again, imagine that you have $109. In the box below is a list of possible ways that this money can be used. Please indicate how much you would like to go to each item. You can put all the money into one item or divide it among them any way you choose.

For the on-budget surplus, the box offered four options (whose positions were rotated): increasing current spending on one or more desired items; giving a tax rebate; strengthening Social Security and Medicare; and paying down of the national debt.

After deciding how to distribute the on-budget surplus, participants were asked to consider the off-budget surplus for this year:

Now I would like to know what you want to do with the $325 surplus from payroll taxes for Social Security. It is important to remember that around the year 2018 there will no longer be a Social Security surplus. Because the government has borrowed money from the Social Security Trust Fund for other programs over the years, the government will then need to come up with money to pay back the Trust Fund so that it can make benefit payments.

So there are two questions that need to be answered. First is, “What should the government do with the surplus now?” And second, “What should the government do so as to repay money the Social Security Fund will need for benefits starting around 2018?”

First, let’s look at some of the options for what the government should do with the $325 Social Security surplus now. Using the box below, indicate how much you would like to go to each item. You can divide the money among paying down the debt, cutting taxes, or increasing spending any way you choose; however, if you decide to create retirement accounts, you must put all the money toward this option, because this is the only way to make such a system financially viable.

Findings
For the surplus overall, 71% of the money was devoted to the long-term goals of shoring up Social Security and Medicare or paying down the national debt. Twenty-nine percent went to the short-term goals of tax relief or new spending.

Respondents were first asked about how they wanted to allocate the on-budget surplus, and then asked how they wanted to allocate the Social Security surplus. The options were slightly different in each case, so they do not combine perfectly.

However, one striking pattern was that 71% of the allocations overall went to either shoring up Social Security and Medicare or paying down the national debt. Just 11% went to new discretionary spending and 18% went to tax relief.

This is striking because it is often assumed that Americans cannot resist the short-term gratification of tax relief or spending on their favorite government program. But in fact the lion’s share went to the long term considerations about Social Security, Medicare and the national debt, and only quite modest amounts to the short term gratification of tax relief and new spending.

Interestingly, among older respondents who would themselves arguably benefit less from the long-term investment in the future, support was even a bit stronger for such investments than it was for younger people who have more to gain from it.

It is a curious coincidence that the average distribution of surplus funds made by the whole sample in the current study is similar to the proportions of the public who identify one or another of these four options as the top priority. This can be discerned in the mass of poll questions that have been asked on this subject in the last two years. To offer a single example, ABC/Washington Post asked in September 1999: “Which of these do you think should be the top priority for any surplus money in the federal budget -- cut federal income taxes, put it toward reducing the national debt, strengthen the Social Security system or increase spending on other domestic programs?” Only 20% chose “cut federal income taxes,” and another 13% chose “increase spending on other domestic programs”-for a total of 33% putting short-term goals first. Forty-three percent chose “strengthen the Social Security system,” and another 24% chose “reduce debt,” for a total of 67% choosing long-term goals.[10] For an in depth discussion of the poll research done by other organizations on the subject of the surplus, see Appendix A.

Allocating the On-Budget Surplus
By far, the most popular purpose for the on-budget surplus was to put the money toward strengthening Social Security and Medicare. On average, $47 of the $109 was used for this purpose and 82% of respondents used at least some of the money for this purpose.

Sixty-six percent of respondents also put some money toward paying down the national debt. Overall, an average of $25 went to this purpose.

Fifty-six percent of respondents put some money toward a tax rebate. Overall, an average of $27 went to this purpose.

Only 38% used any of the on-budget surplus to increase current spending, while a strong 62% majority rejected this option by leaving it at zero. Overall, just $10 went to this purpose. Education received the biggest portion of these funds, with respondents on average putting $2.27 toward this area. Medical research received the second largest boost ($1.84). Defense and job training were the only other areas to receive an average increase of more than a dollar ($1.24 and $1.10, respectively). Also notable is the environment and natural resources, which got another 99 cents. The seven other areas received lesser amounts: space and science 69 cents, transportation 60 cents, humanitarian and economic aid 41 cents, UN and UN peacekeeping 27 cents, justice 26 cents, State Department 21 cents, and military aid 18 cents.

Options for On-Budget Surplus [random order]	Mean	% Allocating Funds to Option
Increase spending for one or more of the twelve budget items in the question you just completed (spending more on debt reduction can be done on this screen). If you choose this, in a moment you will be able to decide how you want the money spent.	$10.04	38%
Give a tax rebate. This will be a one-time rebate payable to all taxpayers based on the amount of tax they paid this year.	$26.78	56%
Use it to help strengthen Social Security and Medicare. This will save the money in a special account that, by law, can only be used for Social Security and Medicare in the future	$47.05	82%
Pay down part of the national debt. This will mean the US will have lower interest payments to make, and will pay off the debt sooner, freeing up money that could be directed to other purposes.	$25.14	66%

Allocating the Social Security Surplus
When asked to distribute the surplus from Social Security payroll taxes among four options -- establishing retirement accounts, paying down the national debt, cutting taxes, or adding funds to the current budget -- a slim majority chose to establish retirement accounts. More than one-third put wanted to save some money by reducing the debt, about one in four wanted some money to go to tax cuts, and likewise, one in four put some money toward increased spending for programs. Overall, a majority wanted to see the Social Security surplus somehow “banked” for Social Security directly. A strong majority reserved the entire amount for either retirement accounts or debt reduction.

A slim majority of 51% chose retirement accounts, which, logically, got slightly more than half of the $325 when all responses are averaged. Because it was necessary for respondents to put all of their money in retirement accounts, none of the other three options received a majority of the funds. Thirty-seven percent put some amount toward paying down the national debt; 28% put some money toward a tax cut; and 25% put some money toward increased spending.

While 51% chose retirement accounts -- an option that required respondents to put in the entire amount -- another 13% chose to put the entire amount toward paying down the national debt. Thus, a strong majority of 64% put the entire $325 toward one or another vehicle that was described as strengthening the capacity to pay future Social Security retirement benefits. Another 10% distributed the biggest chunk of their funds to debt reduction, meaning that 74% made the Social Security issue their first priority. Just 14% and 12%, respectively, made their highest priority either a tax cut or current spending.

The box below shows what respondents saw and how average amounts were allocated.

Social Security Surplus Options [random order]	Overall Mean	% Allocating Funds to Option	Mean Allocation
The government could effectively save the money by using it to pay down the national debt. Those who favor this approach say that this will ensure that the government will not spend the money on other things and will put the government in a stronger financial position when it will need to come up with money to start making benefit payments around the year 2018	$73.72	37%	$198.53
The government could use the money to cut taxes. Those who favor this approach say that this is simply giving the surplus money back to the people who paid it, and that cutting taxes will stimulate the economy.	$47.09	28%	$169.72
The government could use the money to increase spending on a number of programs, such as education. Those who favor this approach emphasize that after all these years of holding back spending due to the deficit, many programs have been left under-funded.	$37.08	25%	$147.68
The government could use the money to establish retirement accounts for the individuals who paid the Social Security taxes. Those who favor this approach say that taxpayers can then be sure that the government won’t spend that money on other things, and that these accounts will probably produce higher retirement benefits because people will be able to invest their funds in the stock market.	$167.11	51%	$325.00

Willingness to invest in retirement accounts was fairly resilient, even when offered a chance to reconsider. Those who selected retirement accounts were shown a pro argument and a con argument on the subject and given the opportunity to alter their choice. The arguments read:

Those who oppose retirement accounts argue that it is risky to let people put the money in the stock market, and that if the money is put into retirement accounts it will not be available for paying benefits, thus the government will have to come up with other money much sooner than 2018, probably around 2007.

Those who favor retirement accounts point out that while the government may need to come up with more money in the short run, in the long run the retirement accounts will produce such high returns that total benefits will be greater and at a lower cost.

Having read these arguments, what would you like to do?

Of the group that had selected retirement accounts in the previous step, only 7% (4% of the full sample) decided to go back and review their options. Thus, a 48% plurality was prepared to set aside every dollar of the Social Security surplus to create individual accounts within the Social Security system.

When posed the problem of needing to begin repaying the Social Security Trust Fund in the future, an overwhelming majority wanted to pay back the Trust Fund by cutting future spending, rather than through increased taxes or new debt.

Finally, after all respondents had been given a chance to deal with the budget and projected surpluses, they were asked how they would prefer to pay back the Social Security Trust Fund when it becomes necessary to do so. In the future the Trust Fund will run out of money and the government will need to generate new funds to cover benefit payments. According to current projections this will become necessary around the year 2018. However, if the retirement account system is set up, this will take funds that would otherwise go into the Trust Fund, thus making it necessary to generate new funds as early as 2007. To ask respondents how they wanted to deal with this question, it was necessary to ask it a bit differently for those who favored retirement accounts and those who did not.

Those who chose to establish retirement accounts saw the following:

As noted earlier, setting up retirement accounts will make it necessary for the government to start paying money back to the Social Security Trust Fund in about the year 2007. This is because surplus money that would otherwise be going into the trust fund will be used to help establish retirement accounts. Below are some options for how the government can raise this money. Please indicate what percentage of the money you would like to see raised from each of the options below.

As the box shows, respondents on average preferred to see 84% of the money used to repay the Trust Fund come from cuts in government spending. Increases in income taxes would account for only 9% of the funds, and just 8% would be borrowed. A nearly unanimous 98% wanted to see at least some of the money come from cuts in spending; about a third preferred to see some of the money come from tax increases; only about one in five wanted to borrow money.

Options for Paying Back Trust Fund (respondents who chose retirement accounts)	Mean %	% Choosing
Increase income taxes.	8.9%	33%
Cut government spending.	83.6%	98%
Borrow money (i.e. run a deficit).	7.5%	22%

Those who chose not to establish retirement accounts saw the following question:

As you know, in the year 2018 the Federal Government will have to start paying back the money it borrowed from the Social Security Trust Fund. Below are some options for how the government can raise this money. Please indicate what percentage of the money you would like to see raised from each of the options below.

In this case, the responses were very similar to those of the people who did want to establish retirement accounts. Respondents wanted the vast majority of money to repay the Trust Fund -- 77% -- to come from cuts in government spending, and wanted only small percentages to come from increased taxes (11%) or borrowing (12%). Again, nearly every respondent -- 98% -- wanted at least some of the money to come from cuts in spending. However, strong pluralities also wanted to see some of the funds raised from higher income taxes (43%) and new government borrowing (39%).

Options for Paying Back Trust Fund (respondents who did not choose retirement accounts)	Mean %	% Choosing
Increase income taxes.	11.3%	43%
Cut government spending.	77.0%	97%
Borrow money (i.e. run a deficit).	11.7%	39%

It seems that the most important priority for both groups is that there not be a return to deficit spending. Both groups would raise more than three of every four dollars through spending cuts, with the remainder roughly split equally between increasing taxes and acquiring new debt. Almost everyone in both groups wanted at least some money to come from spending cuts. And among both supporters and opponents of retirement accounts, borrowing money to reimburse the trust fund was the least preferred option.

If there is any difference to speak of, it seems that those who favor retirement accounts marginally prefer a lesser government role than do those who reject such accounts -- a view that is consistent with the original preference for accounts. They wanted to raise an even higher proportion of funds from cuts in spending (84% to 77%) and they were also somewhat less likely to favor having at least part of the money come from taxes or deficit spending. But again, the gap between the two groups is very small, and the overwhelming consensus is that Social Security benefits should be afforded by cutting spending first and borrowing last.