The national debate on the future of Social Security is surrounded by falsehoods and misconceptions regarding the program's finances and its relationship to the federal budget -- misconceptions that are repeatedly reinforced by major media outlets. In fact, as it's currently constructed, Social Security cannot add to the deficit in the long run, does not present a major threat to America's fiscal future, and is backed by some of the safest financial assets in the world.
NY Times: Trust Fund "Really Serves As An Accounting Device." From a New York Times article:
Although Social Security is often said to have a "trust fund," the term really serves as an accounting device, to track the pay-as-you-go program's revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.
Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.
For accounting purposes, the system's accumulated revenue is placed in Treasury securities.
In a year like this, the paper gains from the interest earned on the securities will more than cover the difference between what it takes in and pays out. [The New York Times, 3/24/10]
NY Times' Bai: Trust Fund "Is Sort Of Like Saying You're Rich Because Your Friend Has Promised To Give You 10 Million Bucks Just As Soon As He Wins The Lottery." From Matt Bai's "Political Times" column:
The [Strengthen Social Security] coalition bases its case on the idea that Social Security is actually in fine fiscal shape, since it has amassed a pile of Treasury Bills -- often referred to as i.o.u.'s -- in a dedicated trust fund. This is true enough, except that the only way for the government to actually make good on these i.o.u.'s is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases -- none of which seem like especially practical options for the long term. So this is sort of like saying that you're rich because your friend has promised to give you 10 million bucks just as soon as he wins the lottery.
Mr. Blumenauer said he believes that the fund, backed by government securities, is solvent and will remain so for decades to come, but argues that the balance between revenue and costs will need to be adjusted in order to guarantee full benefits for future generations. [The New York Times, 8/25/10]
Wash. Post's Sloan: Trust Fund Is "One Of The World's Biggest Piles Of Funny Money"; It Is "Of No Economic Value." From a business column by The Washington Post's Allan Sloan:
There's real money, then there's funny money -- stuff that looks real but isn't.
Today, let's talk about one of the world's biggest piles of funny money -- the $2.54 trillion Social Security trust fund. It matters now because Social Security revealed plans last week to tap the fund for $41 billion this year and will begin tapping it on a regular basis in less than five years.
This year's cash deficit, the first since the early 1980s and the biggest ever, means the government will have to borrow money to redeem some of the Treasury securities in the trust fund. Even at a time when Uncle Sam is borrowing $1.5 trillion a year to keep his checks from bouncing, $41 billion is real money.
Here's why the trust fund is funny money. Let's say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenue is below its expenses, Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow money to pay me, regardless of how big the trust fund is.
In other words, the trust fund is of no economic value. [The Washington Post, 8/10/10]
Wash. Post's Gerson: Idea That Trust Fund "Is Not In Immediate Trouble ... Depends On An Elaborate Accounting Trick." From Washington Post columnist Michael Gerson:
Obama's liberal base contends that the Social Security trust fund is not in immediate trouble. But this argument depends on an elaborate accounting trick. The trust fund is not filled with assets - gold bullion and Apple stock. It is filled with debt issued by the government to itself. The surpluses of the trust fund are in fact liabilities for the government as a whole. And these illusory surpluses are regularly used to subsidize the rest of the budget. The scheme begins to collapse in 2037, when promised benefits for Social Security recipients will suddenly drop by about 25 percent - unless the system is reformed. [The Washington Post, 12/28/10]
CS Monitor Editorial: "As For That Fat Trust Fund, It's Filled With Special Government Bonds That Are Effectively IOUs." From a Christian Science Monitor editorial:
As for that fat trust fund, it's filled with special government bonds that are effectively IOUs. Over the years, the fund has bankrolled other government spending, and what's in the "lock box" are merely promises to pay.
One can argue, as those who think everything is fine do, that the trust fund bonds have the full backing of the US government. But that does not change the fact that redeeming them will require the government to borrow, tax, or cut, even as the nation's fiscal health deteriorates. [The Christian Science Monitor, 3/30/11]
USA Today Editorial: "The Trust Fund Is, At Least In Cash Terms, A Fiction ... No More Than A Collection Of IOUs." From a USA Today editorial:
A powerful combination of beneficiaries, interest groups such as AARP, and congressional Democrats insist Social Security isn't really losing money but merely withdrawing cash from the trust fund it has built up with excess payroll taxes since 1983.
That's half true. Since 1983, Americans have indeed paid far more taxes than Social Security needed to pay benefits. In theory, at least, the trust fund contains about $2.6 trillion and would keep the program solvent until approximately 2037 -- if the fund were real. Sadly, the trust fund is, at least in cash terms, a fiction.
In reality, the trust fund is no more than a collection of IOUs. The money went out the door as soon as it was collected to pay for roads and bridges and aircraft carriers and food inspection and everything else the government does. While they lasted, the Social Security surpluses made deficits seem smaller. But they didn't get saved.
So now that it's time to make up the difference between the money Social Security takes in and the checks it pays out, withdrawing money from the trust fund means borrowing it and adding it to the deficit. The problem will only get worse as Baby Boomers retire. [USA Today, 2/21/11]
Reality: Securities In Trust Funds Are "Just As Safe As U.S. Savings Bonds" And Depend On "Solvency Of The Federal Government"
National Academy of Social Insurance: Treasury Is Bound By "Legal Commitment" To "Redeem The Securities With Interest" When Needed To Pay Benefits. From "Social Security Finances: Findings of the 2010 Trustees Report," by Virginia P. Reno and Elizabeth Lamme of the National Academy of Social Insurance:
Interest on the national debt is a legal obligation of the federal government. At the end of fiscal year 2009, total interest on the debt was $383 billion (U.S. Treasury 2010b). Some people worry when they hear that Social Security annual cash surpluses are loaned to the U.S. Treasury and the government spends the cash on other activities. This is not a misuse of Social Security funds. Regardless of how the government uses the cash, the Treasury securities held by the trust funds are a binding legal commitment for the Treasury to redeem the securities with interest when the money is needed to pay Social Security benefits. ["Social Security Finances: Findings of the 2010 Trustees Report," NASI.org, 8/10]
Co-Director Of Social Security Works: "These Are Legal Instruments, Not Casual 'IOUs.' " Nancy J. Altman, co-director of Social Security Works, told Media Matters:
Congress has always required that whenever Social Security runs a surplus, it invests that surplus in the safest investment on Earth -- interest-bearing Treasury bonds backed by the full faith and credit of the United States. There are several dozen civil servants at Treasury and the Social Security Administration keeping meticulous account of monies owed to Social Security. If the United States failed to pay the interest or the principal when demanded, it would default on its obligations, something that has never happened in the history of the United States. These are legal instruments, not casual "IOUs." [Media Matters, 3/11/11]
Social Security Administration: "[S]pecial-Issue Securities Are ... Just As Safe As U.S. Savings Bonds Or Other Financial Instruments Of The Federal Government." From the website of the Social Security Administration:
Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government. [SSA.gov, retrieved 4/13/11]
CBPP: 1983 Reforms Designed "To Help Pre-Fund Some Of The Costs Of The Baby Boomers' Retirement." Paul Van de Water of the Center on Budget and Policy Priorities wrote:
Social Security has run a surplus in every year since 1984, as was anticipated when Congress enacted and President Reagan signed the legislation based on the recommendations of the Greenspan Commission in 1983. The authors of the 1983 legislation purposely designed program financing in this manner to help pre-fund some of the costs of the baby boomers' retirement. [Center on Budget and Policy Priorities, 10/5/10]
Century Foundation's Anrig: Trust Fund "Will Be Paid Back ... By Taxes Collected In The Future -- Just As The Government Has Paid Back Interest And Principle On All Securities It Has Ever Issued." Greg Anrig of the Century Foundation wrote on its group blog, Taking Note:
Backed by the full faith and credit of the U.S. government, the interest and principal on the Treasury securities in the trust fund will be paid back in full by taxes collected in the future -- just as the government has paid back interest and principal on all securities that the government has ever been issued. No additional burden is placed on future taxpayers due to Social Security beyond the commitment that was already made through the reforms in 1983. [Greg Anrig, Taking Note, 3/9/11]
CBPP: "Trust Funds Are Invested In Treasury Securities That Are Every Bit As Sound As The U.S. Government Securities Held By Investors Around The Globe." Van de Water wrote:
[T]he Social Security trust funds are invested in Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard those securities as being among the world's very safest investments.
[T]he Treasury securities that the trust funds hold are backed by the full faith and credit of the U.S. government. The U.S. government has never defaulted on its obligations, and investors consider U.S. government securities to be one of the world's safest investments. [Center on Budget and Policy Priorities, 10/5/10, emphasis original]
CBPP: Repaying Trust "Will Be A Concern For The Treasury -- But Not For Social Security, As Long As The Solvency Of The Federal Government Itself Is Not Called Into Question." Van de Water wrote:
Some critics have suggested that the lending of Social Security trust fund reserves to the Treasury represents a misuse of those funds. This view reflects a misunderstanding of how the Treasury manages the federal government's finances.
The Treasury always uses whatever cash is on hand -- whether from Social Security contributions or other earmarked or non-earmarked sources -- to meet its current obligations before engaging in additional borrowing from the public.
Money that the federal government borrows from the public or from Social Security is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and business. In neither case does this represent a "raid" or misuse of the funds. The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.
When Social Security needs to start cashing in its holdings of Treasury securities to meet its benefit obligations, the federal government will have to increase its borrowing from the public, or raise taxes, or spend less. That will be a concern for the Treasury -- but not for Social Security, as long as the solvency of the federal government itself is not called into question. Social Security will be able to sell its bonds just as any private investor might do. [Center on Budget and Policy Priorities, 10/5/10]
Fiscal Times' White: "Nobody Should Imagine That Investing The Funds In Treasury Instruments Is A Bad Decision." From a post by Joseph White on The Fiscal Times' Capital Exchange blog:
[B]y buying federal debt the federal government "owes the money to itself." But that reduces future federal interest obligations that would have been owed to the public. As I explained in an earlier post, it's like using extra income now to pay off your mortgage, so your living expenses will be lower during retirement. Nobody would call that "fake" retirement planning.
If the Social Security surplus were invested in bonds or stocks, that might seem more "real" to some people. But the income from the stocks or bonds would be largely balanced out by extra interest expense on the federal bonds sold to the public instead of credited to the trust funds. Social Security would also take on substantial market risk. I and others have endorsed modest diversification of the trust funds' portfolios, but nobody should imagine that investing the funds in Treasury instruments is a bad decision. [Joseph White, Capital Exchange, 10/19/10]
AP: "Social Security Will Post Nearly $600 Billion In Deficits Over The Next Decade." From an Associated Press article:
Social Security will post nearly $600 billion in deficits over the next decade as the economy struggles to recover and millions of baby boomers stand at the brink of retirement, according to new congressional projections.
This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday. That figure swells to $130 billion when a new one-year cut in payroll taxes is included, though Congress has promised to repay any lost revenue from the tax cut. [The Associated Press, 1/27/11]
NY Times: "[B]y Decade's End," National Debt "Will Reach Economically Dangerous Levels As More Retirees Claim Medicare And Social Security." From a New York Times article:
Both parties also face internal rifts that could hinder any grand bargain to reduce the annual deficits adding to the accumulated debt, which by decade's end will reach economically dangerous levels as more retirees claim Medicare and Social Security. [The New York Times, 10/25/10]
CS Monitor Editorial: "Congress Must Mess With [Social Security] In Order To Save This Bedrock Program And Help Head Off A Looming Debt Crisis." From a Christian Science Monitor editorial:
Don't mess with Social Security. That was the clear message of Senate majority leader Harry Reid and other Democrats when they staged a rally on Capitol Hill on Monday. But Congress must mess with it in order to save this bedrock program and help head off a looming debt crisis.
A group of bipartisan lawmakers in the Senate is looking at Medicare, Medicaid, and, yes, Social Security, as federal entitlements that must be reformed in order to confront the nation's building debt problem. [The Christian Science Monitor, 3/30/11]
NY Times Editorial: Deficit Reduction Will "Require Curbs On ... Medicare, Medicaid And Social Security." From a New York Times editorial:
Cutting the deficit will also require curbs on the government's biggest and most popular entitlement programs -- Medicare, Medicaid and Social Security, collectively 40 percent of the budget. Ditto military spending, another 20 percent. Yet Republicans pledge to shield seniors, veterans and the troops from spending cuts. [The New York Times, 9/25/10]
Reality: Social Security Is Projected To Have Run $82 Billion Surplus In 2010; Law Bars It From Borrowing
CBO: Trust Funds Are Projected To Have Run $82 Billion Surplus In 2010. From January projections by the Congressional Budget Office:
[Combined OASDI Trust Funds, CBO.gov, 1/11]
EPI: "Law Prohibits" Social Security "From Borrowing." From an Economic Policy Institute briefing paper by Harry C. Ballantyne, Lawrence Mishel, and Monique Morrissey:
Social Security can only spend what it receives in tax revenues and has accumulated in its trust fund from past surpluses and interest earnings. It cannot add to the deficit if the trust fund is exhausted because the law prohibits it from borrowing (if current revenues and savings in the trust fund are not sufficient to pay promised benefits, these have to be cut). [Economic Policy Institute, 8/6/10]
EPI: "Social Security Can Run A Short-Run Deficit Only If It Has Previously Run Surpluses." From the EPI briefing paper:
As Social Security chief Actuary Stephen Goss succinctly put it: "Trust Funds enforce long-term budget neutrality. Total spending to date cannot exceed income to date" (Goss 2010). Social Security can run a short-run deficit only if it has previously run surpluses. Thus, when it is drawing down trust fund assets to pay for the Baby Boomer retirement, it will be contributing to the unified budget deficit, a measure that includes Social Security. But over time, Social Security cannot add to the federal deficit. [Economic Policy Institute, 8/6/10]
CEPR's Baker: "The Deficit Was Incurred When The Money Was Lent To the Social Security Trust Fund In The First Place." From a blog post by Dean Baker, co-director of the Center for Economic Policy Research:
[White House Office of Management and Budget Director Jacob Lew] said that Social Security does not add to the deficit.
Lew based his claim on the law governing Social Security's operations, it can only spend money that has in its trust fund. This money comes either from the designated Social Security tax or from the bonds and interest on the bonds that were bought using the surplus from prior years. No money can come from general revenue.
Selling these bonds to fund Social Security no more raises the deficit than the decision of a rich person to sell bonds to finance their consumption raises the deficit. The deficit was incurred when the money was lent to the Social Security trust fund in the first place.
The size of the deficit, including the money borrowed from Social Security -- the on-budget deficit -- is reported in every budget document put out by the government (e.g. here and here). [Beat the Press, Center for Economic Policy Research, 3/11/11]
Wash. Post: Medicare, Medicaid, And Social Security Are "The Primary Drivers ... Of The Nation's Financial Problems." From a Washington Post article:
For President Obama, the stakes are much higher than simply fulfilling a campaign pledge or crossing off an important item on his first-term to-do list. A reform bill that reins in the soaring costs of Medicare and Medicaid -- the primary drivers, along with Social Security, of the nation's financial problems -- could fundamentally alter the federal budget outlook, clear the way for other Obama priorities and cement his party's reputation for fiscal responsibility. [The Washington Post, 8/14/09]
CNNMoney: "Programs Like Social Security, Medicare And Medicaid Are Driving Projected Long-Term Debt Higher." From a CNNMoney.com article:
For 2012, there will be an added twist. [Rep. Paul] Ryan is planning to include some sort of entitlement reform in his plan. And that's a potential sticking point. Programs like Social Security, Medicare and Medicaid are driving projected long-term debt higher -- but are cherished, and will require a mountain of political will to reform. [CNNMoney.com, 3/29/11]
NY Times: "Huge Costs" Of Social Security, Medicare, And Medicaid Are "The Most Pressing Long-Term Budget Problem." From a New York Times article:
Neither party has put forward specific proposals to begin grappling with the most pressing long-term budget problem: the huge costs in the Medicare, Medicaid and Social Security programs as the population ages and medical costs rise, a bill that could overwhelm the government and crimp the economy if not addressed. [The New York Times, 2/14/11]
Wash. Post Editorial: "The Country Is Headed For Fiscal Catastrophe Unless It ... Reduce[s] Projected Social Security Benefits for Future Retirees." From a Washington Post editorial:
The reality, as Mr. Obama understands, is that the country is headed for fiscal catastrophe unless it does some politically unpopular things: unwind the Bush tax cuts, including for the middle class; reduce projected Social Security benefits for future retirees, exempting the poor and disabled; rein in the cost of health care; limit popular income tax deductions. Mr. Obama knows this, but last night he did little to prepare Americans for any of it. The best you could say is that he left the door open to work with Congress on these issues. [The Washington Post, 1/25/11]
NY Times: Medicare And Social Security Are "The Biggest Drivers Of The Government's Projected Long-Term Debt." From a New York Times article:
As President Obama and Congress brace to battle over how to reduce chronic annual budget deficits, Americans overwhelmingly say that in general they prefer cutting government spending to paying higher taxes, according to the latest New York Times/CBS News poll.
Yet their preference for spending cuts, even in programs that benefit them, dissolves when they are presented with specific options related to Medicare and Social Security, the programs that directly touch the most people and also are the biggest drivers of the government's projected long-term debt. [The New York Times, 1/20/11]
Wash. Post: Social Security "Forecast To Worsen Future Deficits Unless Taxes Are Raised Or Benefits Are Reduced." From a Washington Post article:
Hours after [hedge fund manager Pete] Peterson screened his [anti-debt] ads for reporters, the Pew Economic Policy Group made a bipartisan pitch to reform Social Security, which is forecast to worsen future deficits unless taxes are raised or benefits are reduced. The Capitol Hill event featured Democrat Robert Greenstein, executive director of the Center on Budget and Policy Priorities, and Republican Charles Blahous, a newly appointed public trustee for Social Security and Medicare who co-authored a paper agreeing that the Social Security shortfall is real and that the safety net will fray unless policymakers act quickly to fix it. [The Washington Post, 11/9/10]
NY Times: Social Security And Medicare Will Be "Pushed To The Edge Of Collapse." From a New York Times Week in Review piece:
Theoretically, the enormous United States debt -- $13.7 trillion and climbing -- might conjure up a bleak scenario: more than a million public employees laid off; virtually everything else in the government including the military would face cuts; social welfare safety nets torn down; research programs canceled; national parks left untended; arts and cultural institutions abandoned.
But as foreboding as the forecast may be -- especially over the long term, as Social Security and Medicare are pushed to the edge of collapse -- the relative economic strength and leverage of the United States mean that cuts as steep and as fast-acting as Britain's can be averted. [The New York Times, 10/23/10]
Reality: Social Security And Medicare Projected To Affect The Budget In Fundamentally Different Ways
CBO: Social Security Payments Will Be Just Over 6 Percent Of GDP In 2035, "Reaching 6.3 Percent Of GDP In 2080." From CBO's June 2010 Long-Term Budget Outlook:
According to CBO's projections, the number of people age 65 or older will increase by 90 percent between now and 2035, compared with an increase of just 12 percent over that period in the number of people ages 20 to 64. Today, that older population is one-fifth the size of the younger population; at those rates of growth, it will be more than one-third the size of the younger group by 2035 (see Figure 3-2). About 92 million people will be collecting Social Security benefits in 2035, CBO projects, compared with 53 million who receive benefits today. Furthermore, the average benefit will have grown nearly as fast as GDP per person. CBO therefore estimates that, unless changes are made to Social Security, spending for the program will rise from 4.8 percent of GDP today to 6.2 percent by 2035. Spending for Social Security will then dip slightly to 5.9 percent as members of the large baby-boom generation die, but it will later turn upward again--reaching 6.3 percent of GDP in 2080--as a result of beneficiaries' increasing life spans. ["The Long-Term Budget Outlook," CBO.gov 6/10]
CBO: Medicare Payments Will Be 6 Percent Of GDP In 2035; 11 Percent In 2080. From CBO's June 2010 Long-Term Budget Outlook:
In 2010, federal spending on Medicare, Medicaid, and CHIP will amount to 5.5 percent of GDP, CBO expects, with Medicare accounting for 3.6 percent of GDP and federal spending on Medicaid and CHIP adding 1.9 percent of GDP.
Under the extended-baseline scenario, federal spending for those programs and for the exchange subsidies would total about 10 percent of GDP in 2035; about 6 percent would be for Medicare, and about 4 percent would be for Medicaid, CHIP, and the exchange subsidies (see Figure 2-2). Extrapolating to 2080, total federal spending on these major health care programs would reach about 17 percent of GDP: Medicare's share would be between 11 percent and 12 percent, and the share for Medicaid, CHIP, and the exchange subsidies would be between 5 and 6 percent. The figures for 2080 should be viewed with much more caution because of greater uncertainty involved in making such long-range projections. ["The Long-Term Budget Outlook," CBO.gov 6/10]
EPI: "In Reality, Health Care Cost Inflation And Insufficient Tax Revenues Are By Far Our Biggest Long-Term Budget Challenges." From the EPI briefing paper by Ballantyne, Mishel, and Morrissey:
In reality, health care cost inflation and insufficient tax revenues are by far our biggest long-term budget challenges.
[Economic Policy Institute, 8/6/10]
Kaiser Family Foundation: Medicare Financing Comes From Payroll Taxes, General Revenue, Premiums, And A Tax On Social Security Benefits. From "Medicare Spending and Financing: A Primer," by the Kaiser Family Foundation:
In financing Medicare, the government draws from several sources of revenue: a dedicated Medicare payroll tax, general revenue (primarily federal income taxes), premiums collected from beneficiaries, a tax on Social Security benefits, and, since 2006, payments from states for the Medicare drug benefit, which shifted some state Medicaid program expenditures to Medicare (Exhibit 8).
Operationally, Medicare financing is conducted through two trust fund accounts. The Hospital Insurance (HI) Trust Fund finances inpatient hospital care other services covered under Medicare Part A, and the Supplementary Medical Insurance (SMI) Trust Fund finances physician and other services covered under Medicare Part B along with the Part D prescription drug benefit.
[Kaiser Family Foundation, Medicare Spending and Financing: A Primer, 2/14/11]
NASI: Social Security Trust Fund Financing Comes From "Contributions From Workers," "Interest On Treasury Securities Held By The Trust Funds," and "Income Taxes" On Higher-Earning Beneficiaries. From "Social Security Benefits, Finances and Policy Options: A Primer," by the National Academy of Social Insurance:
Where does the Social Security trust fund money come from?
Social Security contributions from workers and employers were about 82 percent of the trust fund's income in 2010. About 15 percent came from interest on Treasury securities held by the trust funds.
Income taxes that some beneficiaries pay on their benefits accounted for 3 percent of trust fund income. (Part of Social Security benefit income is subject to federal income taxes for single beneficiaries with countable income over $25,000 and for couples with such income over $32,000. Countable income includes half of Social Security plus all of most other sources of income.)
["Social Security Benefits, Finances and Policy Options: A Primer," NASI.org, 2/11]