The Corner

Repeat after Me: Social Security Adds To the Deficit

In this morning’s USA Today,  Senator Dick Durbin tries to make (again) the case that “Social Security is not in crisis.” His piece repeats the ideas that Social Security “continues to bring in new funds annually through payroll taxes,” “has a substantial trust fund” and “does not add a penny to the deficit.” However, both the existence of a positive balance in the trust fund and the payroll-tax collection don’t prove the senator’s point that Social Security is not in crisis. While the program is in better shape and more self-funded than Medicare and Medicaid, Social Security is in crisis, it is adding to the deficit, and things will get worst for taxpayers sooner than we think.

Durbin, of course, is not the only one repeating these myths. The president, his former OMB director Peter Orszag, and many others before them have said the same thing, but repeating it won’t make it true.

Republicans, too, share some of the blame when it comes to Social Security. While they seem to understand that the program is in bad shape, many GOP lawmakers have repeatedly said that they won’t touch Social Security. 

I have said it before but it is worth repeating: Congress needs to reform Social Security. This program, like all others, must be on the table for review and possible cuts. For instance, the latest Trustees’ Report made, once again, very clear that by refusing to reform Social Security, lawmakers  are guaranteeing automatic benefit cuts of about 20-something percent for everyone on the program in 2035 (the Social Security trust fund will be exhausted in 2035, the combined retirement and disability trust funds will run dry in 2033, and both will continue to deteriorate). The current discourse doesn’t encourage current and future retirees to plan for a replacement income when that time comes. Of course, if in this distant future, Congress does what it does best — cave to special interests (in this case future seniors who won’t be happy to see their benefits cut) — then taxpayers will have to pick up the tab. Neither option is good.

But things will get extra costly long before 2033 or 2035. Since 2010, Social Security has been running a permanent cash-flow deficit. That means that taxes collected for the program aren’t enough to cover the benefits paid to retirees. According to USA Today’s rebuttal to Durbin, the Office of Management and Budget’s “Analytical Perspectives” document (p.465) shows that in 2010, the gap was $36 billion, in 2011 it was $48 billion, and in 2015 it will be at least $86 billion.

#more#To fill the gap, the program is drawing from the trust-fund balances (first using interest, then the principal) to keep payments to retirees going; in concrete terms, Treasury will have to borrow money to pay back the trust funds. The federal government doesn’t have the money to pay the trust fund back because it spent everything on stimulus,wars, education, green jobs, and more typical government consumption. Thus, in order to repay the program so it can continue to pay out benefits today at the promised levels, the federal government has to borrow more money. In the future, it could also increase taxes to get more revenue, or print more money. None of these options are good for the American people.

When considering the current debate over the fiscal cliff, it is important to remind lawmakers that the gap between Social Security tax collections and the benefits paid is getting wider as Congress (Republicans and Democrats) keeps extending the payroll-tax cut and filling the trust fund with borrowed money. This is a point worth stressing: Adding together the payroll-tax cuts, the earned-income tax credit (EITC) which effectively rebates its beneficiaries’ share of the payroll tax, and legislation such as the Making Work Pay tax credit, the federal government has been filling the Trust Funds with phantom tax revenue for a while, and that means that Social Security isn’t fully funded by taxpayers, as many like to believe. 

By refusing to reform Social Security today, lawmakers are telling the American people that they choose the road to more taxes, more borrowing, or unanticipated benefit cuts for seniors already in the program.

What should we do? First, we should acknowledge that Social Security is in trouble and needs to be reformed. Lawmakers who understand this should have the courage of their convictions and fight to reverse the course we are on. Back in April, my colleague Jason Fichtner recommended a few options to put the trust fund back on solid ground, such as increasing the payroll-tax rate from its usual 12.4 percent to 15.1 percent, cutting benefits by 16.2 percent, or some combination of both. He noted that increasing the eligibility age would achieve that goal too. And of course, we need to remember that extending the payroll-tax cut only aggravates the problem for those who want to preserve the program as it is now.

Another route is to move to private accounts – let people take care of their own retirement plan. For most people, Social Security offers a bad returnon investment and is a very unfair burden on future generations. While we want to help people who are truly in need, the current system is not the way to do it. I would favor moving to a safety net that takes care of truly poor people, independent of their age. I have a piece piece with Nick Gillespie on “generational warfare” that talks about this issue. 

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

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