Social Security and the federal deficit (Part 1)

Washington Post reporter Lori Montgomery’s recent  article on Social Security’s finances has been the subject of blistering critiques by Dean Baker, Paul Krugman, and others who rightly point out that her opinions belong on the editorial page, not the front page. But Social Security’s finances have also tripped up more even-handed observers. To help the genuinely perplexed, here’s a primer on Social Security and the federal deficit (for a more in-depth discussion, go here).  A follow-up blog post will look at the impact of the recession and explain the meaning of Social Security’s primary (or “cash-flow”) deficit.

Does running a deficit mean you’re piling up debt?

Not necessarily. You can be rich as Croesus and still be running a deficit. All it means is that you’re spending more than you’re taking in over a specified period, whether by borrowing or drawing down savings.

Is Social Security running a deficit?

No. Social Security is running a surplus. Its combined revenue sources – payroll taxes, interest from the trust fund, and earmarked income taxes on some Social Security benefits – are still larger than benefit payments. The trust fund, which currently has $2.6 trillion dollars, is projected to grow to around $3.7 trillion in 2022. But once Social Security starts drawing down the principle in the trust fund to help pay for the Baby Boomer retirement, Social Security will be running a deficit. Also, as will be explained at greater length in our second blog post, Social Security is currently running a primary deficit, which means it would be running a deficit absent the interest on the trust fund.

Is drawing down the trust fund a bad thing?

No, that’s what it’s there for. Social Security is structured as a pay-as-you-go program, with current benefits mostly paid out of the revenue from current payroll taxes. With steady population growth, the trust fund would only need enough to handle normal cash flow, like a checking account.  However, for nearly a generation significant savings were built up in the trust fund and are now there to handle the demographic “bulge” of the Baby Boomers’ retirement. The fact that Social Security will tap the trust fund to help pay for the Boomers only comes as a surprise to people like Alan Simpson.

Can Social Security contribute to the federal deficit?

It can, if you’re looking at a unified federal budget. By law, Social Security isn’t considered part of the federal budget since it has dedicated funding. But it can be useful to consider the federal government as a whole, including off-budget programs like Social Security. If you do, Social Security’s surplus or deficit contributes to the unified federal budget surplus or deficit.

Can Social Security contribute to the federal debt?

No. Social Security is prevented by law from borrowing—it can only draw down savings in the trust fund. Since Social Security must operate in long-term balance, it can’t contribute to the federal debt over time. This is true whether you consider Social Security as part of a unified federal budget or as a stand-alone program.

How has Social Security affected the federal deficit over the past decade?

Considered as part of a unified budget, the Social Security surplus offset about a quarter of the federal deficit caused by the Bush-era tax cuts, wars and other factors. This is simple math. The more interesting question may be whether the Social Security surplus encouraged Washington’s profligacy by helping obscure the federal deficit. If it did, the effect was subtle, since the deficit is hardly a secret and the Social Security surplus is relatively small in the grand fiscal scheme.

But didn’t Congress spend the money in the trust fund?

Yes, but it would have spent it anyway. Congress spent way more than what it borrowed from the trust fund, which holds roughly one-fifth of federal debt outstanding. There’s a global market for U.S. Treasury securities, which are especially popular during times of economic turmoil. So even if Social Security had no money in the trust fund or the trust fund were invested in other securities, this would have had little impact on the federal government’s borrowing costs or access to funds. In any case, Social Security has always invested the trust fund in U.S. Treasuries and is required by law to do so. So to make this seem like news, as Montgomery does (“the government has borrowed every cent”), is strange to say the least.

Does this mean there’s no connection between the federal deficit and Social Security?

Unfortunately, no. While Social Security has had little influence on Washington’s spendthrift ways, the converse isn’t true. Social Security benefits are on the chopping block as Congress suddenly finds deficit-cutting religion. In this sense, the retiree at an Occupy Palm Beach protest who waved a sign saying “my Social Security paid for these yachts” is on to something, though his verb tense may be off. But it’s probably better to avoid saying politicians looted Social Security because this implies there’s nothing in the piggy bank. The trust fund may be full of “IOUs,” but that’s just a pejorative way to describe government bonds. If they’re worthless, the real chumps are the hedge funds, investment banks, rich individuals and sovereign governments around the world that have ploughed money into Treasuries – and increased their demand in recent years.

  • E. T. Kendall

    Nice work!

  • 1HandedEconomist

    In addition to the above analysis,which is correct, one must consider the implications of Social Securities savings account on the economy.  When Social Security was running a surplus and packing away treasuries for a rainy day of retiring boomers, the pension plan was helping to fund a deficit our nation was building from the Regan years on forward.  Now Social Security is no longer buying treasuries and will soon be receiving its principle back from the government.  This happens at a time when other retirees are doing the same as they draw down their IRAs.  This means that there is much demand on the government to issue cash for its obligations and fewer buyers because the boomer’s echo generation is smaller than the the boomer generation (which is a good thing because it stabilizes the economy in the long run).  This would be a great time to have a robust economy that is able to pay off these treasuries or at least not need to fund a deficit with treasuries just to keep the wolves at bay. 

    That does not describe the present economy.  40% of government spending is funding ongoing obligations.  Spending cuts that the Tea Party are asking for would lead to an immediate contraction of the economy just when we need it to expand.  Raising taxes will not expand the economy either but will not impact the economy as much as a cut in spending effective spending.  Failure to do either means that inflation is almost inevitable.

    What should we do?  The only sensible course of action is to continue deficit spending while raising taxes on the wealthy.  The wealthy will respond by saving less yet spending about the same as they would without taxes.  The important thing is to spend the money on infrastructure projects that create jobs at all levels of the working scale. From engineers, nuclear scientists, and researchers to bridge builders, school teachers and weatherizing contractors.

    Any new ideas?  How about creating an Intellectual Capital Bank.  This bank invests in pure research that other technologies will exploit to create the game changing productivity gains of the near future.  Government patents from this research (like the ones that NASA holds) would be available to anyone to license at a very low rate as long as the work is done entirely with USA labor.  Since government is rarely the most innovative environment for breakthroughs, the government would partner with private companies that have already patented a viable core technology to fund the development phase between early prototype and production in the same way that venture capitalist can.  The government waives up to 90% of its patent rights based on the percentage of USA labor that exploits that technology.

    • Kerry

      The deficit is NOT from Reagan-It started its greatest increase from the Great Society legislation in the late 60’s (along w/ Vietnam). The truth is the US gov’t has not spend less in any fiscal year than the previous year since 1954.
      If we the people are to get control of future ( to say nothing of our gov’t) we need to drop the political loyally & focus on the math ( non political) solution. We are scheduled to spend $3.7 Trillion & receive (taxes) $2.3 trillion. Where is the possible deficit reductions in these numbers. Obama calls for congress to do the math – what math is he doing?

    • Kerry

      Raise taxes on millionaires – small problem, according to the treasury (IRS) – 100,000 taxpayers earned a million or more dollars last year. Do the math. Take 100,000 and take an addition $1,000,000 in taxes from them. That equals $100 Billion. Great – small problem -the deficit next year is $1,600 Billion. Does this sink in. There is no increase tax rate to the so call wealthy that works. This is not based on my personal situation. I think some of the compensations to corp executives, financial exes., media exes., professional athletes, movie stars, etc is totally outrageous but ther isn’t enough of them to solve the stupid decisions of our gov’t

  • Kjr31

    I believe yr number of SS holdings are low. SS money had financed as high as over 50% of gov’t spending & currently is close to 30%.
    Self serving & compensated officials should be held accountable to tell the people the truth. The gov’t has over spent, and there is NO possible solution from a tax increase (revenues) to solve this delemma. It is clearly been created by an out of control spending pattern.