Social Security and the National Debt

In this season of fiscal brinksmanship, the topic of Social Security has once again come to the fore. Republicans are generally in favor of cutting benefits, although they are bit afraid to say so after the demise of George W. Bush’s privatization “plan”; Democrats are generally in favor of not cutting benefits. But many liberals have another argument: Social Security is irrelevant to the whole issue of deficits and the debt, since the program cannot have any impact on either.

I generally count myself as a liberal, but I think this is a misleading argument. This could take some time to explain, as I’ll try to go through it carefully.

The standard liberal argument goes like this: Social Security has its own funding scheme that is walled off from the rest of the federal government. Employees pay payroll taxes into the Social Security trust funds, and benefits are paid out of those trust funds. The crux of the argument is that Social Security, by law,may not spend money that it does not have in its trust funds.  It is impossible for Social Security to incur a deficit over the long term, since it can only spend money it already collected. In the words of Dean Baker:

“Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund.”

To begin, let’s clear a distracting issue out of the way. The annual federal budget balance is measured two different ways. The “unified budget” balance includes cash flows associated with Social Security (that is, payroll taxes in and benefit payments out). The “on-budget” balance excludes those cash flows (and the Postal Service). Obviously, Social Security does not contribute to the “on-budget” balance but it does contribute to the “unified budget” balance. But that’s all economically irrelevant, since in this case how you measure the thing doesn’t change the thing. (This isn’t quantum physics, after all.) The important number is the amount of money that the federal government has to borrow from the public, and that number is not affected by which budget balance you look at.*

Moving on to the main course: Dean Baker is absolutely right about current law. So for illustrative purposes, let’s posit an alternate universe, in which current law includes the following General Revenues Clause (GRC): “If the Social Security trust funds are unable to pay scheduled benefits to beneficiaries, those benefits will be paid out of general revenues.”

How would the existence of the GRC affect anything? It can’t have any impact on the national debt until the GRC begins to affect actual Social Security cash flows. And that won’t happen for as long as Social Security is able to pay benefits out of its trust funds.

The real question is what happens when the trust funds run out of money, which is currently expected sometime in the 2030s. In the current law universe, benefits automatically get cut to the level of incoming payroll taxes, which will be about a 25 percent cut; Social Security has no impact on government borrowing and hence the national debt. In my alternate universe, Social Security continues to pay full scheduled benefits, which requires additional government borrowing and increases the national debt.

The first question is: Which one do you think is more likely in the real world? Do you really think that Congress will sit by and let Social Security benefits be cut by 25% overnight? Or do you think that Congress will amend the law, essentially inserting the GRC, to preserve full benefits for seniors?

Of course we can’t predict the future with certainty, but I would say that if Congress in twenty-five years is anything like Congress today, it will find a way to pay full benefits. So when we talk about the impact of Social Security on the national debt, the most likely scenario is that it will increase the national debt—exactly as if the GRC existed today. That’s the main reason why I think it makes sense to take Social Security into account when projecting future national debt levels.

But let’s say I’m wrong and that Congress will stand by as seniors’ Social Security checks get cut by 25 percent. That’s not a good thing.

In my universe (where the GRC exists), when the trust funds run out money, Congress will have choices. It could: (a) increase taxes to pay scheduled benefits; (b) reduce other spending (like on aircraft carriers) to pay scheduled benefits; (c) borrow more money to pay scheduled benefits; or (d) cut benefits by 25 percent. In the current law universe, Congress will have to choose (d). It’s not hard to see that my universe is better than the current law universe. The two are equivalent if (d) is a better choice than (a), (b), and (c), but otherwise my universe is preferable. This is especially true for liberals, who in ordinary circumstances would prefer (a), (b), and (c) to (d).

So let’s say we know with certainty that the GRC will never be inserted and benefits will have to be cut. In that case, Social Security cannot increase the national debt. But we would actually be better off if the GRC existed and Social Security could increase the national debt, because of the options that would give Congress in the mid-2030s—including the options to raise taxes on rich people or cut defense spending.

In other words, if you are right that Social Security cannot increase the national debt, you should acknowledge that that is actually a bad thing. If you care about preserving Social Security benefits, you should prefer a world with the GRC.

Put another way, if you make the argument that Social Security cannot increase the national debt, you are conceding that there should be an across-the-board benefit cut the moment that the trust funds run out of money. Is that what you want?

On its face, the statement that Social Security cannot increase the national debt, and therefore should be off the table, seems like a classical liberal position. On inspection, though, I think it is misleading, since Congress is more likely to add the GRC than not. And for traditional liberals, I think it’s actually counterproductive, since it is premised on the unavoidability of a draconian benefit cut in twenty-five years.

* There is a separate, equally confusing, debate over the implications of the fact that the Social Security trust funds are invested in a special kind of Treasury bonds. The short answer is that because Social Security exists, the Treasury Department had to borrow less money from the public in the past few decades, when Social Security was running surpluses; but in the future, the Treasury will have to borrow more money from the public, because the Social Security trust funds will be redeeming some of those special Treasury bonds.

This piece is cross-posted from Baseline Scenario with permission.

9 Responses to "Social Security and the National Debt"

  1. michael roberts   November 30, 2012 at 5:43 am

    If US trend GDP growth and income were to return to rates achieved in the 1960s, the social security funds would not run out in 2030 as contributions would be sufficient. Isn't growth the issue? Faster growth through higher productivity and fuller employment would mean society could easily pay for its rising numbers of seniors. We don't' have to accept this form of economic Malthusianism.

  2. Robert P. Coutinho   December 1, 2012 at 4:11 pm

    …or, you know, the Congress could let the SS Trust Fund managers recommend what the SS tax level should be to keep it on a sustainable path? Oh wait! That would require intelligence.

  3. Kenneth Wallenstein   December 3, 2012 at 1:41 pm

    The real problem – which apparently no one over the age of 65 has the courage to admit – is that social security has never been an actuarially sound program. Faster growth is a pipe dream not a plan. Increasing taxes on the young is unfair and politically impossible. There is no solution to the SS mess, but there are policy options that will favor one group over another. The reality will be unending QE which will result (by my own crude back of the envelope calculations) in 6% inflation but most of it concentrated in medical and other goods and services purchased mostly by seniors where the inflation rate will be closer to 25%. This means no taxes will be raised, seniors get their benefits and even cost of living adjustments, but nonetheless become poorer and poorer. FYI, I am 56 years old.

  4. Jeff   December 4, 2012 at 7:46 am

    There is a third option that you're not considering. Benefits could be indexed now to the CPI rather than wages. If productivity goes up by about 1 percent per year, the trust fund never runs out of money.

  5. DHecker   December 4, 2012 at 7:55 am

    I completely agree that the law precluding payments to Social Security beneficiaries that would exceed the amounts paid in as Social Security taxes absolutely cannot bind a future Congress, which would change that law at the drop of a hat if the then-members in 2030 think it will benefit their reelection prospects. So an honest accounting would have to take into account the political fact it will be extraordinarily difficult not to pay out the Social Security and Medicare benefits to which today's workers believe they are entitled.

  6. DHecker   December 4, 2012 at 7:55 am

    However, I wonder what is the correct way to look at Social Security (and Medicare) taxes versus benefits. It seems to me that the federal government takes cash from my current paycheck, calling some portion of the cash "income taxes" and another portion "FICA taxes." It then uses that cash (plus a good deal of borrowing) to pay current expenses, which include the benefits "owed" to today's Social Security and Medicare recipients. The government then adds some treasury securities to the so-called lockbox. But those are simply promises that future taxpayers will agree that the government can take cash from their earnings and use it to pay the Social Security and Medicare benefits that I will be "owed" when I retire 10 or 20 years from now. No one is investing any of my cash into a 401(k) or pension account, in other words. It is all being used to pay current expenses and I am receiving promises made on behalf of people who will still be working, hopefully, when I retire.

  7. DHecker   December 4, 2012 at 7:56 am

    So, calling anything a "trust fund" seems wildly incorrect. The correct term, I humbly submit, is "welfare." Social Security and Medicare were designed to allow seniors to live out what was expected to be a relatively short life (especially when Social Security was enacted) after retirement without worrying about falling into poverty. The more we allow people to think about these social welfare programs as a middle-class pension rights, the less people will plan for their own retirements and the more intractable the budgetary and economic problems will become.

  8. Bob   December 4, 2012 at 10:11 am

    It would be useful to revise SS accounting to include interest payments to the SS trust fund based on interest rates competitive when funds were borrowed.

  9. Herbert Rothschild   December 4, 2012 at 1:33 pm

    The article creates a problem where one doesn't exist by poisting a false either/or. There are many ways to make the SS trust fund solvent long after the 2030's. The fairest way would be to end the cap on the amount of earnings taxed. It seems that Mr. Kwak, like so many others in the commentariat, cannot bring themselves to envisage a world where the very wealthy must pay back some of wealth they have confiscated from workers.