Some opportunities knock only once in a generation. The U.S. budget surplus is one of them. This year's U.S. federal surplus is likely to approach $40 billion to $60 billion, thanks to a strong economy and an even stronger stock market. Even factoring in a business-cycle dip or two, a total surplus of about $1.5 trillion over the next 10 years is possible. Alas, that much cash can't accumulate in Washington without drawing a crowd of spenders. So the capital is abuzz with politicians asking: What should we do with the surplus?
Our answer: save it, don't spend it. Politicians face overwhelming temptation to buy votes. Washington has three ways to save a surplus. The simplest is to do nothing and let Treasury start paying down the $5.5 trillion national debt. That would lower interest rates and promote growth. Such financial virtue, however, offers no political reward, and Congress will probably not show this kind of self-restraint.
The second way to save is to bolster the wobbly Social Security system. The government could invest the surplus in stocks and bonds, earmarking the returns for Social Security. But that raises the disquieting prospect of Washington owning a growing slice of Corporate America.
The other option is to give the surplus back to U.S. taxpayers in the form of personal savings accounts. Workers could invest in mutual funds for retirement. The U.S. could pay down 27% of its national debt or help the Social Security system as the baby boomers retire. Nice choice. Save the surplus.