Social Security and the Economy: The President and Congress Should Be Happy That Social Security Is Not Part of the Problem, and They Should Leave It Alone

Posted in: Government

In April of this year, the Trustees of the Social Security system issued their annual reports on the financial status and future of the Social Security and Medicare programs.  The reports garnered very little media attention this year, in part because there was no real news in the reports, and in part because everyone is focusing their attention on the 2012 elections.

Even so, there were important lessons to be learned from the otherwise non-newsworthy reports.  Those lessons, moreover, cut against the positions of both parties with respect to Social Security.

If we are to make progress in this country toward solving our real long-term economic problems, then we must change the terms of the debate.  President Obama must stop acting as if Social Security is in big trouble.  The Democrats in Congress (along with President Obama) must stop using Social Security as a bargaining chip in negotiations with Republicans.  And perhaps most important of all, Republicans must stop misrepresenting Social Security’s financial situation.

The best path forward would be for everyone to leave Social Security alone, and instead to do what is necessary to bring the economy back to life.  A healthier economy will make it easier to support our retirees, today and in the future.  Moreover, undercutting Social Security today may well make it more difficult to bring the economy back to robust health.  A strong Social Security system, therefore, goes hand in hand with a healthy economy.

How Social Security Works: Accounting for Annual Surpluses and Deficits Through the Trust Funds

Upon the release of each year’s annual trustees’ reports, the public is briefly fed a storyline about Social Security’s certain doom.  The annual reports, by Congressional directive, must include forecasts of the balances of the various trust funds that the trustees administer.  The Social Security trust fund, which supports the retirement and disability systems, is distinct from the trust fund that supports Medicare.

The Social Security trust fund is—like all financial statements—an accounting mechanism.  It accounts for the amount of money that people pay in Social Security payroll taxes each year, in excess of the amount of money that Social Security has so far been required to pay in benefits to eligible retirees.  Those annual surpluses have been loaned to the U.S. Treasury, allowing the federal government to borrow less money from private lenders and foreign governments than would otherwise have been necessary.  In turn, the Social Security trust fund receives a credit each year for the interest that it earns from having loaned money to the rest of the government (that is, to the American people).

The long-term plan for the Social Security system has long been to accumulate a balance in the trust fund, by collecting more money in taxes each year than is necessary to pay benefits.  Then, when enough of the Baby Boom generation is collecting retirement benefits, we know (and have always known) that the annual surpluses will turn to annual deficits for Social Security.  At that point, the Treasury will be required by law to repay the money that it borrowed from the Social Security system during the years when workers were paying more in taxes than was necessary to cover concurrent benefits.

While some people deride the Social Security trust fund as containing nothing “real,” such complaints are misplaced.  The important role that the trust fund serves is to keep track of just how much workers have overpaid, plus interest, into the retirement system over the last few decades.  Then, when those workers are themselves ready for retirement, they will not be told that their excess payments have disappeared.

We Should Abandon the Tired Annual Ritual of Decrying Social Security’s Impending “Bankruptcy,” Because It Misleads and Frightens the Public

If the Social Security system worked perfectly, the scheduled benefits in excess of taxes in the later years would exactly equal the accumulated surpluses from the earlier years.  As it turns out, however, the legislated increases in benefits (as well as hard-to-anticipate variations in economic growth, population swings, etc.) are such that the trust fund’s balance might reach zero at a time when the system is still scheduled to pay out more in benefits than it is receiving annually in taxes.

That date—the year in which the trust fund’s balance reaches zero—is what news reports always highlight.  This year, the “intermediate” forecast from the trustees shows that Social Security’s trust fund will reach a zero balance in 2033.  A mildly optimistic forecast continues to show that the trust fund might never reach a zero balance, whereas a pessimistic forecast shows that the zero balance could be reached in 2029.

Each year, the political establishment predictably wrings its collective hands and calls for action to prevent Social Security’s “bankruptcy.”  Of course, there is no bankruptcy in Social Security’s future.  Instead, what we will have, at worst, is a time when the Treasury will not be required by law to supplement Social Security’s annual tax collections with money collected from other taxpayers or borrowed through the issuance of Treasury securities.

Should that day come—that is, should we find ourselves in 2033 (or any other year) with a Social Security law that guarantees higher payments to beneficiaries than concurrent taxes can support—then Congress, in that year, (or in any year leading up to that year) could decide to honor the promised levels of benefits, appropriating the funds necessary to prevent a cut in Social Security benefits.

If Congress chooses not to make such appropriations, however, the annual report tells us that Social Security taxes could still cover fully three-fourths of scheduled benefits.  Moreover, those benefits are going to be much higher (in inflation-adjusted terms) than today’s benefits.  Even if Congress refuses to add money into the system, therefore, the worst that could happen is that retirees in some future year will have their benefits cut—but only to levels that are still generally above today’s benefit levels.

The whole public ritual surrounding the annual report, therefore, is a tired and misleading exercise.  The only thing we know is that the intermediate forecast shows that, in 2033, Congress will have the choice of allowing a 25% benefit cut, or of taxing or borrowing enough money to prevent that from happening.

That reality, of course, is far different from claims that Social Security is “about to go bankrupt,” or that it “will not be there for today’s workers.”  The obsession with the supposed exhaustion date of the trust fund, therefore, merely allows shameless political grandstanding, at the expense of unnecessary public panic.

The Calls to “Act Now” Might Sound Responsible, but They Are Actually Mere Excuses to Take Money From Future Retirees and Use That Money for Other Priorities

Some analysts argue that it is only prudent to look ahead, not to “kick the can down the road” (to use one of the more egregiously overused metaphors from the Sunday talk shows).  Acting sooner, we are told, will make things easier to deal with for everyone, rather than waiting until doom is imminent.

Again, however, there is nothing resembling doom in these forecasts.  In the last year that the trust fund is projected to have a positive balance, the Treasury will be paying the difference between Social Security’s benefits and tax revenues.  If Congress chooses, the Treasury can continue to do so after the trust fund goes to zero.  The government’s overall annual borrowing would be no higher in the year after the trust fund goes to zero than in the year before.  The only difference is that the law requiring the Treasury to make up the funding difference would no longer be relevant.

This means that the supposedly responsible path—acting now, to avoid disaster later—is merely an excuse to do something right away that might never become necessary.  If the more optimistic scenario were to become reality, after all, then we would never face a time when the Treasury would even have the legal option of not making good on Social Security’s legal commitments.

It is true that choosing to pay Social Security benefits in full will—in the absence of any other changes in spending and taxing—increase the long-term path of government debt.  But that is true of decisions to support any spending program or tax cut.  To take one example, Congressional Republicans’ recent efforts to undo their agreement to allow military spending to decrease (along with domestic discretionary spending) will also ultimately increase debt.

In other words, the calls to “Act now to save Social Security” amount to nothing more than excuses to reduce promised Social Security benefits, in order to allow other spending programs or tax cuts to take effect.  If current or future Congresses decide to cut Social Security benefits—whether actively or passively, by allowing “automatic” cuts to take effect should the trust fund ever reach a zero balance—then those members of Congress are saying that retirees’ promised benefits are less important than, say, continuing subsidies to oil and gas companies, or continued tax breaks allowing wealthy people to put off paying taxes on their increases in wealth (perhaps forever).

Congress is, of course, empowered to make such choices—as foolish and unfair as they may be.  At the very least, however, we should insist that its Members make those choices openly and clearly.  They can decide to cut future Social Security recipients’ benefits, and to do so rather than raise taxes on people with the highest incomes in the country.  If Congress makes that choice, however, let it say so.  That would put the blame where it belongs—on Congress, not the Social Security system.

What Would Truly Responsible Politicians Do to “Fix” Social Security—Even Though It Is Not Broken?  It’s the Economy, Stupid!

During the annual news coverage of the Social Security trustees’ reports, some reporters note that the year in which the trust fund is forecast to reach zero has changed.  When that year is moved earlier, then this is held up as evidence that the system is “even more broken than we thought.”

Over the course of the last several years, in fact, the “exhaustion date” has been moved earlier.  Not that long ago, the trustees’ were forecasting an exhaustion date (in the intermediate scenario) of 2038.  That date moved up to 2033 last year, and stayed there this year.  What is happening?

There is no mystery.  The Great Recession, and the extremely weak economy in the years since the recession officially ended, have depressed tax collections—including Social Security taxes—because so many people are no longer able to earn money.  In addition, many people who were not ready to retire lost their jobs, leaving them with no choice but to “retire” as a formal matter.  In fact, however, they were not choosing to enjoy their Golden Years.  Instead, they were doing nothing more than bowing to the reality that the economy could not generate enough jobs to provide opportunities for, say, 62-year-olds (or people at any other age, for that matter).  After exhausting their unemployment benefits, they thus reluctantly decided to collect reduced early-retirement Social Security benefits.

All of this means that the annual Social Security surpluses that were supposed to be building up in the trust fund went away over the last few years.  Social Security’s financial prospects, like most people’s, took a hit.

Had President Obama and Congress aggressively tackled the weak economy—engaging in much larger, and much more sustained, spending and tax cut programs to bring the economy back to the point where private firms would have been willing to engage in large-scale hiring—then Social Security’s exhaustion date could have moved in the other direction.  We would then have been living in the world reflected in the trustees’ more optimistic forecasts, avoiding—perhaps forever—the time when Congress would have to actively decide whether to allow Social Security benefits to be cut automatically.

Because Republicans succeeded in blocking any such expansionary policies, they have perversely succeeded in seemingly strengthening their longstanding complaints about Social Security.  A weak economy, in other words, did more than simply make it easier for the Republicans to run against President Obama in 2012.  It also allowed them to increase the volume of their anti-Social Security campaign.  Their strategy is deeply cynical, but is seems to be working.

A “Grand Compromise”?  Social Security Need Not Be, and Must Not Be, a Part of Any Long-Term Plan to Address Government Deficits and Debt

President Obama has recently become much more aggressive in his response to Republican obstructionism, correctly pointing out how much their actions have caused the economy to remain in an unnecessarily weakened state.  Even so, he continues to hint that he would be open to a so-called Grand Compromise.  Just as he did last summer, during the debt-ceiling debacle, the President is at least suggesting that he could agree to cut future Social Security benefits in exchange for Republican concessions on taxes and some spending programs.

If that sounds like sensible centrism to some, that is merely because the terms of the debate have become so badly distorted over the last few years.  The Grand Compromise, after all, is supposedly necessary to deal with long-term “unsustainable” deficits and debt.  Yet the forecasts on which these doomsday scenarios rest show that Social Security is simply not part of any such problem of unsustainability.

The worst-case scenario, as determined by the Congressional Budget Office, shows Social Security’s annual tax revenues falling short of its spending on promised benefits on an ongoing basis.  The amount of that shortfall, however, would not rise.  That is, the Treasury’s spending on Social Security would simply be a constant part of its annual obligations, not a rising one.  That spending could be sustainable, if Congress chose to sustain it.

By contrast, spending in this country on medical care is not sustainable.  Every long-term forecast shows that—because of our expensive, bureaucratic system of private health insurance (and related for-profit entities)—federal spending on health care will outstrip the economy’s ability to support that spending, in the decades ahead.

Cutting Social Security, therefore, would do nothing more than take money from future retirees in order to pay for health care.  Although some of that money would surely be spent on the health care of retirees themselves, much would also flow to the bottom lines of health insurance companies.

President Obama and his allies, therefore, must stop lumping Social Security together with Medicare and Medicaid, and thus must relatedly stop talking about “entitlements” and how they must be reformed.  Reasonable people can always argue that Social Security should be reformed for any of a number of other reasons, but acting as if Social Security is part of a long-term budget time bomb is simply wrong.

At some point, Democrats must stop believing that they can cut their way to prosperity.  Real prosperity requires sustained government support.  When we get back to where we should be as a nation, then that support can be phased out.

At that point, Social Security would continue to be an important part of our society and economy.  People should be able to rely on Social Security.  If Democrats would understand that they hold the stronger position in this debate, then they could stop trying to chip away at a program that brings dignity and independence to millions of older Americans.

  • Ken

    No comments? Amazing!
    Is the problem that congress can not do the math, or is it in the best interest of both partys (the 1% supporters)?
    Who would benefit the most not having social security in place?
    Follow the money.

  • allenwsmithphd

    Dear Dr. Buchanan,

    You have written an excellent, well thought out, article on
    Social Security, which I consider to be the greatest and most successful
    program ever created by the government.
    I agree with all your sentiments, and I believe that all friends of
    Social Security must join together in an effort to make sure that the promises
    of Social Security are fulfilled.

    You have impressive credentials in both economics and law,
    and there is good reason for readers to think that your evaluation of the
    current status and future of Social Security is accurate. I am not a lawyer, but I am an economist
    with a Ph.D. degree in economics from Indiana University. I have devoted the
    past 12 years of my life to researching and writing about Social Security funding,
    and I have published three books on the subject.

    Everything you say would be true IF the intent and
    provisions of the Social Security Amendments of 1983 had been followed. But they were not. The hefty hike in the payroll tax was designed to generate
    surpluses in the Social Security budget for the next 30 years. The surplus Social Security revenue was
    supposed to be saved and used to purchase pre-existing marketable U.S. Treasury
    bonds in the open market. If that had
    been done, the surplus money would have ended up in the hands of those
    bondholder from whom the government purchased the bonds and the trust fund
    would today hold $2.7 trillion in “good-as-gold” marketable Treasury bonds that
    could be resold in the open market in order to raise cash with which to pay
    benefits to the baby boomers. The plan set forth by the 1983 legislation was a
    good plan, and, if it had been followed, everything you say would be true, and
    Social Security would be fully funded until at least 2033. But the plan was not followed.

    Instead of saving the surplus revenue and investing it in
    marketable Treasury bonds, the money was deposited into the general fund and
    spent for wars and other government programs.
    Not one dollar of that $2.7 trillion was used in anyway to further the
    financial health of Social Security.
    The government simply took the money and replaced it with government
    IOUs called “special issues of the Treasury”.
    These IOUs can be held only by the trust funds and they are not
    marketable. They cannot be converted to
    cash as marketable bonds could have been.

    The last surplus in the Social
    Security budget was in 2009. In 2010,
    the Social Security revenue was not even sufficient to pay full benefits. The only real
    money that Social Security has is the monthly flow of payroll tax revenue, plus
    that portion of income taxes paid on Social Security benefits. Even the interest that Social Security is
    supposed to receive on the money the government has “borrowed,” has never been
    paid in cash. Instead, the government “pays interest” to Social Security by
    issuing still more of the same non-marketable IOUs.

    $2.7 trillion in assets that the trust fund allegedly holds does not
    exist. Social Security does not have
    the money, and the government, who spent the money, no longer has it. The only significance of the number is that
    it is a measure of how much Social Security money the government spent on other

    the government does have a moral obligation to repay the looted Social Security
    money, it does not have a legal obligation to do so. In
    1960, in the case of Fleming v. Nestor, the United States Supreme Court ruled
    that nobody has a “contractual earned right“ to Social Security benefits.
    Section 1104 of the 1935 Social Security Act specifically states, “The right to
    alter, amend, or repeal any provision of this Act is hereby reserved to the
    Congress.” Thus, Congress could do whatever it wanted to do with regard to
    changing, or even eliminating, Social Security.

    future of Social Security is in the hands of Congress and the President, who
    have the legal authority to amend any and all parts of the Social Security
    Act. If the surplus Social Security
    money had been saved and invested in marketable U.S. Treasury bonds, there
    would be no way that the government could default on the debt. Marketable U.S. Treasury bonds are traded in
    financial markets around the world, and, if the government defaulted on a
    single marketable bond, it would be seen as a default on all marketable bonds,
    and it would create panic in the financial markets. We can be absolutely sure that the government will never default
    on marketable Treasury bonds, but it might default on its debt to Social
    Security, which is not in the form of marketable bonds. A government default on its Social Security
    debt might raise some eyebrows around the world, but it would not have a major
    adverse effect on holders of default-proof marketable Treasury bonds.

    The friends of Social Security should seek to have the whole
    truth about the trust fund made public, and they should demand that legislation
    be passed that would mandate the repayment of the $2.7 trillion.

    I hope you will take this message seriously and visit my
    website at where you
    can download a free copy of my book, “The Looting of Social Security.” I seek
    your assistance in getting the truth about the trust fund made public. My strongest ally in the media is Allan
    Sloan, Senior editor at large at Fortune magazine. He agrees with everything in this message. We must recruit other allies. Instead of insisting that Social Security
    has no problem, we need to expose the problem and demand that the $2.7 trillion
    be repaid.

    Allen W. Smith, Ph.D.


  • Mike

    Your article of the 21 of June, 2012 is interesting. You talk about the Social Security trust fund. Fact is there are two such independent trust funds for two independent insurance programs. The most important of these is the Old Age and Survivor’s Insurance (OASI). The OASI trust fund at the end of 2011 consisted of 2,524.1 billion dollars worth of U.S. savings bonds – special issue. OASI had a surplus of 95.0 billion dollars for 2011. That amount bought additional bonds for the trust fund. The OASI trust fund is expected to be exhausted in 2035 if nothing is done to extend its solvency. The second program is Disability Insurance (DI) with trust fund assets, in bonds, of 153.9 billion dollars at the end of 2011. DI has an ongoing deficit of about 25 to 30 billion dollars per year. Bonds from its trust fund are cashed in to pay full benefits. Its trust fund will thus be exhausted in 2016. DI requires immediate attention. When a trust fund is zeroed out, Social Security will just cut benefits to the level of its income. These programs will continue and not go broke as some people claim. All of this information is available from the Social Security Administration in their 2012 trustee report for both Social Security and Medicare. They publish this yearly along with a easier-to-read summary. There is nothing unusual about any of this. Just plain insurance. Insurance that is similar to many other such programs in private industry.
    One other thing about trust funds. The year you mentioned, 2033, is really the exhaustion date of a pseudo trust fund, OASDI, formed by arithmetically adding the assets of the two actual trust funds. I do not know why Social Security does that. To me it makes no sense and obscures the details of either. One purpose of these trust funds is to provide a buffer in case of unexpected deficits. And they also are excellent, conservative investments to boost income above the payroll tax. In 2011 the OASI trust fund interest was 106.5 billion dollars and interest for the DI trust fund was 7.8 billion dollars. An interest rate of approximately 4.3% for that year. Not too shabby.
    I agree with your statement that Social Security should be left alone. However changes will be needed to strengthen these programs. Only the congress and the president can change laws that will achieve an actuarial life of 75 years as is normally expected from similar types of private insurance programs. Our politicians have evaded their fiduciary responsibility in this regard. But the idea that Social Security must be changed as part of solving the national deficit/debt is nonsense. As a whole Social Security is financially balanced today and should remain so after suitable modifications. The national debt problem is elsewhere.
    BTW, Medicare plan A has a trust fund called Hospital Insurance and operates identically to Social Security as an insurance plan. HI is half of Medicare. The other half, SMI, is dependent upon the general fund to the tune of about 220 billion dollars in 2011 and thus becomes a part of our deficit/debt problem. Not HI though.


    Michael McCullough
    Aliso Viejo, CA