As negotiations to avoid the fiscal cliff continue (or not – who really knows), Democrats are saying Social Security is not relevant to getting the deficit under control. Senator Dick Durbin (D-Ill) said this about Social Security:
“Social Security does not add one penny to our debt -- not a penny. It's a separate funded operation …”
White House Press Secretary Jay Carney agreed:
“We should address the drivers of the deficit, and Social Security is not currently a driver of the deficit.”
In a literal and superficial sense, these statements may be defensible. But let’s look at the reality behind the technicalities. While Mr. Carney claims that Social Security is not “currently a driver” of budget deficit, it is certainly increasing the amount of money that the federal government has to borrow each year in order to fund its operations.
Similarly, as Senator Durbin says, Social Security is separately funded – sort of. There is a separate Social Security tax. The question is, what happens when the amount of Social Security taxes coming in does not cover the amount of Social Security benefits going out. My guess is that Senator Durbin would say this is not a problem because that extra money is just coming out of the balance that has been built up in the Social Security Trust Fund over the years. I, on the other hand, say the federal government has to borrow the money to pay those benefits. Let’s see who is right – and the answer will explain why Mr. Carney’s and Senator Durbin’s statements are wrong.
I previously talked about how Social Security is financed in my post “How Social Security Fits Into Our Deficit/National Debt/Entitlement Spending Problem”. Let’s review the situation today. But first, let’s look at some history, especially as it relates to what happens when Social Security taxes and Social Security payments do not match. As I said in my earlier post, when Social Security is in surplus, i.e., when we are collecting more in Social Security taxes than we are paying out in Social Security benefits (which is the way it used to be), the Social Security Administration takes the extra money that comes in and “invests” it in U.S. government bonds. In other words, it gives it to the U.S. Treasury and gets back an IOU.*
Today, however, Social Security is no longer in a surplus situation. Today the Social Security Administration is collecting less money in taxes than it is paying out in benefits. So where does the Social Security Administration get the extra money to pay these benefits? It goes to the U.S. Treasury and asks for some of its money back. And where does the Treasury get the money to pay to the Social Security Administration? Simple, it borrows it – along with all of the other money it has to borrow each year.
In other words, politicians can claim that Social Security does not add “to our debt” and that it is not a “driver of the deficit,” but it does add to the amount of money the Treasury has to borrow each year, which seems like debt and deficit to me. And with more and more the baby boomers retiring each year, it is only going to be worse unless our politicians face up to what is really happening, as opposed to technicalities that sound good and let them put off tough decisions.
----------
* In other words, in spite of what some politicians may have told us in the past, there is not and there never has been a “lockbox” where people’s Social Security money was put and protected. The excess money in Social Security was always given to the U.S. Treasury and used to fund government operations. When the Social Security Administration needs the money back, the Treasury has to go out and borrow it, unless it has some extra money laying around, which it clearly doesn’t at this point.
Comments