Tags: National Debt | Social Security | balance | balanced | depression | constitution | treasury

To Understand Social Security Skip the Myths

To Understand Social Security Skip the Myths

Tuesday, 17 July 2018 01:30 PM Current | Bio | Archive

Social Security benefits used to be paid entirely with current payroll tax revenues.

During the 1970s Congress increased the tax so the government could bank some money while also paying current benefits. The banked money would help support future pensioners when fewer workers would be paying taxes to support them. The extra money went into the Social Security Trust Fund.

At the end of 2017 the fund balance was nearly three trillion dollars.

Critics claim that the government stole this money and spent it already. These claims are utter balderdash. The Treasury borrowed the money to pay current operating expenses. But it issued government bonds to the trust fund, and is legally obligated to repay this money, plus interest, when needed to cover Social Security benefits.

These bonds, backed by the government's "full faith and credit," were the trust fund's safest possible investment. If it invested the extra money in corporate bonds, the principal would decrease if prevailing interest rates increase. Putting the extra money into stocks would risk having the balance cut in half by market meltdowns like what happened in 2008-2009. Sticking the money in a governmental "mattress" would have seen its value eroded by inflation.

As predicted, payroll taxes and interest on the trust fund's bonds are now falling short of the amount needed to pay Social Security benefits. The trust fund, as intended, will therefore gradually be drawn down to handle the extra costs. Critics complain that this will require cutting other government expenses, increasing taxes, or increasing the national debt by borrowing the money.

The critics are flat out wrong.

Borrowing funds to pay back what the Treasury owes Social Security will not increase the national debt. The national debt includes money loaned to the United States Treasury by individuals, corporations, foreign governments, and by the Social Security Trust Fund. Every dollar borrowed from other sources to pay money back to Social Security would reduce what is owed to the trust fund by the same amount, since money paid back to the Trust Fund reduces the amount still owed to it.

When one part of the national debt goes up and another goes down by an equal amount, no net change in the total debt would result.

Ultimately the trust fund will run out of money unless the payroll tax is increased.. But Social Security won't be "bankrupt." Current payroll tax receipts will be still be available, but benefits would have to be reduced by about 19 percent. This reduction would be extremely unpleasant for older Americans, but it need not happen.

Increasing the payroll tax by about 25 percent when the trust fund is depleted would allow continued payment of full benefits. The necessary tax increase would be substantially lower if done well before the Trust Fund is used up.

People who blame Social Security for the current deficits are talking out of their hats.

Governmental accounting distorts the real picture. It exaggerates annual deficits now that payroll tax receipts are less than Social Security payments.

Likewise, it understated deficits (or exaggerated surpluses) back when payroll taxes were bringing in more than needed to pay current benefits. A more accurate way to calculate annual operating deficits would be to base them on how much the total national debt has increased, which as I noted is not affected by Social Security taxes or disbursements.

Since Social Security is not responsible for the current deficits caused by the government's operating budget and tax cuts, cutting benefits while the trust fund is solvent is totally unnecessary. In a age of disappearing private pensions, it would cause pain to millions of Americans.

Cutting benefits would also reduce Social Security's protection of the economy during recessions. The Great Depression came before creation of Social Security. Even employed people hesitated to spend what they had, or to incur debt to purchase things. They feared that they too might lose their jobs and need the money.

During our recent recession millions of Americans drawing Social Security had dependable incomes allowing them to spend what they had, providing a floor under economic activity.

A proposed "balanced budget" amendment to the Constitution, recently and thankfully shot down, would have made it illegal to redeem the balance currently in the Social Security trust fund and forced immediate cuts in Social Security payments.

Repudiating the Treasury's obligation to repay the nearly three trillion dollars currently in the fund would indeed be stealing the money, and this certainly is a temptation for politicians trying to get their fingers in the cookie jar.

We should not fall for the economic nonsense they peddle to justify their schemes.

Paul F. deLespinasse is Professor Emeritus of Political Science and Computer Science at Adrian College. He received his Ph.D. from Johns Hopkins University in 1966, and has been a National Merit Scholar, an NDEA Fellow, a Woodrow Wilson Fellow, and a Fellow in Law and Political Science at the Harvard Law School. His college textbook, "Thinking About Politics: American Government in Associational Perspective," was published 1981 and his most recent book is "The Case of the Racist Choir Conductor: Struggling With America's Original Sin." His columns have appeared in newspapers in Michigan, Oregon, and a number of other states. To read more of his reports — Click Here Now.

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Social Security is not responsible for current deficits caused by the government's operating budget and tax cuts. Cutting benefits while the trust fund is solvent is totally unnecessary. In a age of disappearing pensions, it would cause pain to millions.
balance, balanced, depression, constitution, treasury
Tuesday, 17 July 2018 01:30 PM
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