The Corner

Social Security Is Part of the Problem

The director of the Office of Management and Budget, Jack Lew, can repeat as often as he likes, in as many outlets as will host him, that Social Security payments won’t or don’t contribute to the deficit, but that doesn’t make it true.

Here’s what he said during an interview with NPR’s Steve Inskeep last week — I couldn’t believe my ears:

[Social Security] doesn’t contribute to the deficit this year, or next year, or in this 10-year window, or even for a long time beyond that.

And here’s what he writes in USA Today this morning:

Specifically, looking to the next two decades, Social Security does not cause our deficits.

Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.

In a piece called “Can You Trust the Social Security Trust Funds?” my colleague Jason Fichtner and I explain why this is wrong. Here is the short explanation: Yes, in theory, Social Security benefits are self-financing with a 12.4 percent payroll tax, but that doesn’t mean the money collected is there to pay for benefits. That’s because when Congress changed the law in 1983 so that in any given year, current taxpayers pay more in taxes than the program needs to pay all the benefits, it also required that the program invest the difference, or surplus, into trust funds, which can only invest money in special-issue Treasury bonds. No other bonds, just Treasuries. 

And what has Treasury done with the money? Well, the federal government has spent it on its daily consumption: education, loan guarantees, wars, etc. In other words, the government has already spent the money it received in exchange for the IOUs. The current projections say that in 2015, the Social Security Trust Funds will run out of cash and the program will begin permanently paying out more benefits than it collects in taxes. At that point, the program will start redeeming the IOUs in the trust funds and use them to pay benefits to current seniors until they run out. But, remember, the money is not there anymore. So then what? Well, in order to repay the program so it can continue to pay out benefits at the promised levels, the federal government will have to borrow more money, increase taxes to get more revenue, or print more dollars.

The only way Lew is correct to say that Social Security payments to seniors won’t increase future deficits is if he means to say that the federal government will print more money, or tax the American people a second time to pay back the money it owes to the trust funds. The alternative is to stop paying current retirees’ benefits, which he claimed during his NPR interview would never happen. So which one is it, Mr. Lew: taxes, inflation, or debt? My guess is that the federal government will borrow more money. So why claim that it won’t?

We don’t even have to wait until 2015 for Social Security to increase the deficit. As a result of the 2 percent payroll-tax cut included in the deal to extend the Bush tax rates, the program will contribute to the deficit this year. Over at e21, economist Chuck Blahous had a very good article back in December explaining why.

The problem is not with the tax relief but with an accompanying accounting gimmick: as described, the provision would also issue $120 billion in additional debt (from general revenues) to the Social Security Trust Fund – in other words, changing the government’s accounting to make it appear as though the $120 billion had been collected even though it hadn’t.

This is more than a harmless accounting entry; because Social Security spending is statutorily limited to the amount of assets in the Trust Fund, the accounting maneuver increases the government’s spending authority by $120 billion plus interest to be accumulated over decades to come.

The government doesn’t have a surplus of $120 billion. It will have to borrow it. That contributes to the deficit, doesn’t it?

In his USA Today piece, Lew writes:

For years, the surpluses in the Social Security trust fund have helped to mask our deficits elsewhere. Now that we are paying Social Security back, the problem is not with Social Security, but with the rest of the budget.

This is true. For years, the federal government has used the tax money collected for Social Security for other spending; as a result, it didn’t have to borrow as much as it would have if it hadn’t had access to that money. But that’s no reason to claim that Social Security payments going forward aren’t going to increase the deficit. They will. If they don’t, it will be because taxpayers get taxed for benefits all over again.

That, in my opinion, is the real scandal when it comes to entitlement spending. It’s one thing to make promises of benefits that aren’t backed by taxes. That’s why we call them unfunded liabilities. It’s a massive problem, it’s irresponsible, and it should be reformed. But it is not as bad as telling taxpayers that taxes are being collected today to pay for benefits in the future (the value of the trust funds) while squandering the money so that this funded portion of the promised benefits ends up being gone and taxpayers have to foot the bill a second time through taxes, inflation, or a bigger budget deficit.

But yes, “the rest of the budget” is a real problem. So why isn’t Mr. Lew’s budget cutting more spending?

For more on this issue, go here.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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