Friday, March 11, 2011

Does Social Security Really Need Fixing?

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 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.


Jim Moses said...

I agree with this for the most part. But Social Security funds, which ARE actually collected through payroll deduction, are used in two ways:to pay for benefits for the currently qualified;to fund the trust account.

The trust fund is not an asset .. but a part of the national debt, since they are excess collected funds pledged to future benefits. However, these funds are not invested or held in other assets. They are, instead, backed by US bonds and securities.

That, in itself, holds either promise or risk, depending on your view of the financial stability of the US govt. Recently, it looks more like risk.

Here's an unusually rosy view:

But the MUCH bigger immediate problem is NOT the structure of SocSec itself which, if left alone, would have been solvent until approx. 2042.

It IS that Congress (with public support or, at least, not enough public opposition to matter) chose to treat the Trust Fund not as a debt .. but as another asset which could be borrowed against to fund unbalanced budgets .. in the belief that it could be paid back at a later date.

This has forced a "Social Security solution" via benefits reduction of one kind or another .. but is NOT the same thing as saying Social Security in its original design was fatally flawed.

The fix is actually on the US budget side .. and social security trust funds should be isolated from future operational borrowing.

The trust fund was, by design, ALREADY pledged against future known expense .. so borrowing debt to pay deficit is not exactly reasonable.

While I think it's good to look at whatever solution it takes .. it irks me a bit that national time is spent in debate about Social Security flaws when the real problem is elsewhere .. and MUCH larger than SocSec itself; that problem being basic fiscal responsibility on the part of government .. and the citizens who support or allow its irresponsible actions.

There is no "Them " to blame .. or to take action to solve .. only US.

This is a good thought exercise but in my view it should point us to general principles of fiscal responsibility versus adjustments to component systems to make up for MUCH greater unaddressed flaws..

Napp Nazworth said...

As I argue above, I do think that setting SS up as a pay-as-you-go system is a design flaw, and the reason behind its current deficits.

There is another issue, though, which I didn't address. SS basically forces future generations to accept a system that they didn't vote for. Other social welfare programs, such as Medicare and Medicaid, can easily be changed by future generations if they don't like them. With SS, on the other hand, this would be much more difficult because the part of the population that have been paying into the system expect (correctly) to be provided for by the system when they retire.