Social Security and the federal debt

With the U.S. national debt now surpassing $19 trillion, opponents of our traditional Social Security system are quick to draw correlations between the Trust Fund’s long-term insolvency problems and our steadily growing pile of debt.

To them, Social Security represents entitlement spending that our country simply can’t afford, especially as the ratio of working people contributing for each recipient is expected to drop to just 2:1 in the next few decades.  With no changes to Social Security, this demographic challenge will exhaust surplus funds, severely complicating our government’s ability to pay the full amount of each retiree’s benefits or make those payments on time.

Simply put, opponents of Social Security say it’s nothing more than a drag on our debt — a drag that’s predicted to get even worse after 2034, the projected insolvency date.

They say it’s failing.  They say it’s bankrupt.  And they say we should get rid of it — or at the very least, cut benefits to shreds.

But those fighting to protect and expand benefits say this is an absolute falsehood.  They claim Social Security has never contributed a single penny to the national debt — they even say it’s legally impossible for Social Security to do so.

So who’s right?  Is Social Security adding zeros to our debt or are lawmakers building straw men to justify cuts to our benefits?

First, we need to look at how the Social Security Trust Fund is funded.

The money you receive when you collect your benefits is generated by the Federal Insurance Contributions Act (or FICA) tax. It’s a 12.4% payroll tax split between a worker and his or her employer (each pays 6.2%).

Since 1984, the Trust Fund has collected more in FICA taxes than it’s paid out, creating a surplus that the U.S. Treasury invests in interest-bearing bonds and securities (this is by design — in 1983, the payroll tax was increased to build this surplus, partially in anticipation of the large amount of Baby Boomers set to retire 20 years later).  The interest earned from those bonds also provides income for the Trust Fund.

Between income collected from the payroll tax and interest income generated from bonds, the Trust Funds will be able to pay full benefits up until 2034.  If no changes are made, at that time the surplus will be exhausted and the combined income from taxes and interest isn’t expected to be enough to pay 100% of retirees’ benefits.

Until then, Social Security remains an insurance system with a dedicated source of income.  Social Security has always met its obligations to beneficiaries — as of right now, Social Security has not only never defaulted on its payments, but has built a reserve of $2.81 trillion (as of the beginning of 2016).

It’s hard to say Social Security is adding to the federal debt when — after benefits are paid — we’re sitting on trillions of dollars.  Social Security was designed to be a self-funded retirement insurance plan, and until the surplus is exhausted, a self-funded retirement insurance plan is what it remains.

There’s also the small matter of federal law prohibiting OASDI from being included in the budget.  Officially, Social Security is an off-budget item.

These are the primary reasons why supporters of Social Security claim it has absolutely nothing to do with the national debt.

But is that entirely true?  Not necessarily.

Remember those interest-bearing bonds?  Another feature of the payroll tax hike in 1983 was that it allowed the government to borrow that surplus and redirect it to general funds.  Those bonds represent Social Security loaning the federal government money for general use in return for repayment with interest later.  That interest is also paid in bonds.

In other words, those bonds are debts owed to Social Security by the federal government.

So it seems to be a matter of how you look at it.  Social Security has always paid for itself and then some, and the government has always honored its obligation to pay benefits, but when surplus money is borrowed by the government and converted into bonds, it becomes debt.

But the important thing isn’t whether or not the Trust Fund creates debt.  In fact, we set it up that way intentionally.  In return, interest from that debt creates an important source of revenue for Social Security.

In reality, the money our government owes to Social Security represents a very small portion of our overall national debt.  If our policymakers are concerned about reducing that debt, taking an axe to Social Security should be low priority.

The bigger issue is this debt is being used to paint the picture of a mortally-wounded and dysfunctional system that has become a burden to American taxpayers.  And that picture is being used to justify harsh cuts, reductions, and discussion about eliminating the traditional Social Security system entirely.

This is not true.  Plain and simple.

Despite long-term solvency challenges, the fact of the matter is Social Security is the most successful anti-poverty measure the United States has ever instituted.  Along with significantly reducing senior poverty, it has funded itself via the payroll tax since Day One.  And as for the bonds, they are backed by the full faith and credit of the United States — that’s the best credit there is.

The challenges Social Security faces today merely reflect a need for change to keep up with the cost of retirement and address the demographic shifting in our society — a change that can and must include an expansion of benefits for retirees.