Yesterday, I explained that, contrary to what OMB director Jack Lew claims, Social Security is in fact contributing to the deficit. The main reason, I argued, is that the Social Security Trust Funds are required by law to invest in Treasuries. The payroll-tax proceeds collected to pay for future benefits are thereby handed over to the federal government, which then spends it. Each time the program runs a cash-flow deficit, it redeems some of its trust-fund IOUs, and the government then has to borrow money, which adds to the deficit . In other words, while it’s not really Social Security’s fault, the reality is that the program contributes to the deficit.
Today, I read this piece by AEI’s Alan Viard, who is even harder on the program than I am. He looks at the issue from a different angle:
In 2009 and 2010 Congress enacted four provisions authorizing implicit or explicit transfers of general revenue to the Social Security Trust Fund, continuing a pattern set by earlier provisions.
Social Security’s raid on the general treasury has largely escaped attention. Indeed, in a startling inversion of reality, the general treasury is often accused of raiding Social Security, based on the premise that the $1.7 trillion of surplus Social Security taxes collected from 1984 to 2014 have been looted from the program. In reality, current law provides that the surplus taxes will be paid back to Social Security more than fourfold (reflecting compound interest), enabling the program to pay $7.2 trillion of benefits in excess of taxes from 2015 to 2037.
Although general revenue financing averts Social Security tax increases and benefit cuts, it forces larger tax increases and spending cuts in the remainder of the federal budget. Using the general treasury as a piggy bank for Social Security distorts the budgetary process by giving the program the best of both worlds. Social Security receives political protection from tax increases and benefit cuts on the grounds that it is a self-supporting program financed by earmarked taxes, but it is not required to actually live within its earmarked revenue.
The provisions that Viard is talking about are stimulus provisions, e.g., the one-time $250 check for Social Security recipients, or the Making Work Pay credits in 2009 and 2010, which refunded up to $400 (single) and $800 (married couples) of employees’ payroll taxes. (In my opinion, the $250 check did represent an increase in benefits for seniors funded through general revenues, but the other provision, I would say, was another instance of social engineering through the tax code rather than an example of Social Security raiding the general funds.)
The bottom line is that no matter how we look at it, Social Security is contributing to present and future deficits. Short of privatization (which I would favor), Congress should make the program truly independent and self-supporting. In this case, it should collect taxes that will be earmarked to pay for benefits and only benefits. Social Security shouldn’t have to turn over its cash to Treasury, and it shouldn’t be allowed to receive money from the general revenue.