Democrats and Republicans BOTH Wrong on Social Security

Social Security could be affected by current arguments about what to do about the so-called fiscal cliff, the debt ceiling, and related matters.

In January, the tax cuts enacted during President George W. Bush's Administration will expire and, at the same time, automatic cuts in spending in both domestic and defense programs will occur. In addition, the reduction in the Social Security payroll tax will expire.  A few weeks after that, the U.S. Treasury will reach the debt ceiling and be unable to borrow more money without an extension.

When the Bush-era tax cuts were passed, the nation was enjoying big surpluses.  But some legislators worried that economic conditions could change and so a sunset provision was passed to terminate the tax cuts unless re-enacted by Congress.  

In 2011, President Obama and Congress agreed to extend these tax cuts for two additional years to allow time for the economy, which was in recession, to improve.  At the same time, a one-year reduction in the payroll tax, to be made up by revenue from the general fund, was passed and then extended for another year, which will soon end as well.

Also in 2011, Obama and the Congress increased the debt limit with a requirement that a Super Committee find ways to reduce the deficit.  If that Committee failed--and it did--an automatic sequester would occur that would generally cut spending across-the-board (with some exemptions).  

That is now about to happen, while five new Obamacare taxes will go into effect at the same time.

As this is written, there is not even a framework for an agreement on what to do with these multiple situations.  But there have been discussions about "entitlement reform."  Entitlements mean Social Security, Medicare, and Medicaid.  Reform can be very good or very bad, depending on specifics.

Ironically, various Republicans, Democrats, and newspapers have seriously mischaracterized, in opposite ways, the situation with Social Security.

Senator Dick Durbin (D-IL), the Senate Majority Whip, claims that no adjustments are necessary with Social Security, as everything is A-OK.  Writing in USA Today, Durbin says:

"Unchanged, Social Security will make every scheduled payment through 2033…

"Put simply: Social Security is not in crisis…Social Security is not facing an urgent deadline as part of the 'fiscal cliff.' What's more, Social Security does not add a penny to our deficit. It has a substantial trust fund and continues to bring in new funds annually through payroll taxes. For that reason, we should be focusing these negotiations on those policies that have created the fiscal cliff."

In an editorial, USA Today expressed the opposing view--that Social Security does add to deficits.  It cites figures from Analytical Perspectives of the President's Budget showing that Social Security ran a deficit of $48 billion last year and will run a deficit of $50.7 billion this year.  
 
The newspaper went on to express its opinion:

"Social Security has always been a pay-as-you-go program: Each year's payroll taxes fund each year's benefits. From 1983 through 2009, Social Security collected more in taxes than it paid in benefits.

"The surpluses were supposed to go into the trust fund, protected by what Al Gore called a lockbox when he ran for president in 2000. Alas, there is no lockbox and never has been; the money came into the Treasury and went out just as quickly, spent on the government's day-to-day expenses and replaced by IOUs in a file cabinet.

"Financing the difference between benefits paid and taxes collected requires borrowing money, which increases annual deficits and adds to the cumulative national debt. That's the economic fact."

The Republican-controlled House Ways and Means Committee also criticized Durbin in what it called "Democrats' denial over Social Security:"

Yesterday, the White House joined a chorus of leading Democrats who refuse to reform Social Security and protect benefits for future generations, claiming that it is currently "not a driver of the deficit."  Senate Whip Dick Durbin (D-IL) today echoed this position saying we ought to put entitlement reform off for another time and repeating his claim that Social Security "doesn't add a penny to the deficit."

Unfortunately for Democrats, that is not true.  As multiple fact checks and articles have noted, Social Security is in the red, and projections are only getting worse.

So who’s correct?  The answer is: All three are partially right, but all three are mostly wrong.

For the last three decades, more money has been produced by the Social Security payroll tax than was needed to pay benefits. By law, the surplus was "invested" in special issue, non-negotiable Treasury Bonds, which in turn were used to finance the general operations of the federal government.  

Essentially, the federal government was living "high off the hog" on Social Security funds and the Social Security Trust Fund was receiving IOUs in return.

The October 2012 report of the Financial Management Service of the U.S. Department of the Treasury states that the IOUs in the Social Security Trust Fund (old age and disability) amounted to $2.708,810 Trillion.

The more than $2.7 Trillion borrowed from Social Security through the end of October is part of the $16,261,470,510,720.74 total national debt.

That $2.7 Trillion is legally owed to Social Security and must be paid back.

To put it another way: Social Security has never added even one penny—not one!—to the national debt. It is just the opposite: A big part of the national debt is owed to Social Security.

It is true that the Social Security payroll tax is no longer producing enough money to pay benefits, but the Social Security Trust Fund is owed annual interest on the money the federal government has borrowed from it.  In Fiscal 2011, that came to $114.4 Billion.

So, to say that Social Security is adding to the federal deficit is absurd.  The Trust Fund holds $2.7 Trillion in "assets" i.e. IOUs from the federal government.  And the reason it has these IOUs is because the federal government borrowed the money and used it on other things.

For USA Today and the House Ways and Means Committee to complain about having to now pay interest on the money it borrowed from Social Security, or to eventually have to pay back the principal, is truly bizarre.

USA Today is especially disingenuous when it says "Social Security has always been a pay-as-you-go program."

That's just false!  

The Social Security surpluses are supposed to be saved for the day--which has now arrived--when they would be needed to pay benefits. Unfortunately, both Democrats and Republicans eagerly raided Social Security to use that money for other things.  Nevertheless, the IOUs in the Trust Fund are legal obligations of the federal government and must be honored.

But Durbin is also wrong as he can be when he points confidently to the Trust Fund and how it "continues to bring in new funds annually through payroll taxes."

No, the payroll taxes are no longer raising enough money to pay full Social Security benefits.  Furthermore, the IOUs in the Trust Fund are not genuine assets.  The White House Office of Management and Budget explained:

These balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense.

These funds are not set up to be pension funds, like the funds of private pension plans. The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits.

Instead, they are claims on the Treasury. When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures.

The existence of large trust fund balances, therefore, does not, by itself, increase the Government's ability to pay benefits.

Nonetheless, seniors and their families must insist that all of this money that is owed to Social Security be paid back--and with no carping from those members of Congress who'd like to use that money for other purposes!

Two other things can be done to reform Social Security in a positive way.

First, increase the retirement age to at least 70, maybe 73, or even 75.  (It is now being very gradually raised over a 22-year period to 67.)  When the retirement age was originally set at 65, the life expectancy in the U.S. was only 61. Now, it is 83 for men and 85 for women.

Today's seniors are perfectly capable of working much longer than previous generations and thereby paying payroll taxes for additional years before drawing out Social Security.  Of course, special provisions should be available for those persons whose health requires an earlier retirement.

Second, means test Social Security benefits.  There is no money available to send checks each month to very high-income seniors who don't need it. Instead, we should make sure Social Security is there in the future for the folks who do need it.

If we do these two things, there will be no need to reduce benefits to solve the fiscal cliff--or for any other reason.

Next week, this newsletter will look at changes in Medicare that are being considered.

The previous issue of What's Happening with Seniors Benefits: Supreme Court Orders Appeals Court to Hear Obamacare Case

The previous issue What's Happening with Conservatives and the Tea Party: Lessons Learned in the Election
 
Previous issues of both newsletters.

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