The confluence of these events has generated a frenzy of new policy proposals, with the three main alternatives being tax cuts, changes in government spending, and efforts to save the budget surplus via debt reduction. Faced with historic opportunities but significant uncertainties, the single most important policy choice the Congress and Administration could make would be to develop a set of budget rules and procedures that do a better job of describing the government s true fiscal status, comparing the costs and benefits of policy alternatives, and protecting against the uncertainties. The first problem relates to how the budget counts retirement funds. About 60 percent of the so-called surplus is due to accumulations in trust funds for social security, medicare, and government pensions for military and civilian employees. Private firms are forbidden to spend their pension reserves on current operating expenses.
State governments choose to separate their pensions from their operating budget.
The federal government should do the same. Currently, though, the budget includes the annual surplus of the trust funds but omits the expected future spending. In principle, the right way to measure the government s financial status would be to include both the current surpluses and future spending liabilities, but this raises a number of difficult issues. At the very least, though, if the liabilities are excluded, the assets should be too. The second problem concerns how the budget projects the consequences of current policy.