In a recent Op-ed for USA Today, Office of Management and Budget Director Jacob Lew argued that “Social Security isn't the problem.” Social Security isn't running a deficit, according to Lew because the Social Security “trust fund” will make up the difference between the revenue generated by Social Security taxes (FICA) and the amount Social Security pays in benefits for the next 26 years.
Other Democrats have also made similar claims. Harry Reid, Chuck Schumer, and Richard Durbin have all recently claimed that Social Security does not add to the deficit (see FactCheck.org). Also, former Clinton Labor Secretary Robert Reich recently wrote, “Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.”
Until last year, Social Security had been running surpluses. The revenue generated by the FICA tax was more than enough to pay out to Social Security beneficiaries. The Social Security trust fund used this additional money to buy treasury bonds, or borrow money from the federal government. These Democrats are arguing, therefore, that since Social Security is now running deficits, it only has to cash in those bonds to pay the difference, and it has enough bonds on hand to pay the difference for another 26 years.
There is a major flaw, however, in this logic. Social Security is a federal government program. So, when one part of the federal government borrows money from another part of the federal government, it amounts to nothing more than paper shuffling. (There are actual papers that are “shuffled” in filing cabinets at the Social Security Administration office in Parkersburg, WV.)
When Social Security cashes in those bonds, the revenue has to come from the federal government. That means that, if the federal government is running deficits as it is now, it must borrow more money by selling more debt to someone besides itself to pay for it.
As the Concord Coalition points out, the Congressional Budget Office has made the same point when it wrote:
Trust funds have no particular economic significance. They do not hold separate cash balances; instead they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use.
Social Security deficits, therefore, are contributing to our federal government deficits. The Social Security “trust fund” is a mirage. It is simply an “accounting mechanism” and contains nothing of real value.
Social Security is the single largest federal program and is a major contributor to our federal government deficits today and in the future. Unlike the deficits in Medicare and Medicaid, however, fixing Social Security's problems are easy and well known. In tomorrow's post, I'll describe seven ways to fix Social Security. Can you guess all seven before then? Let me know in the comment section below.