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.