Social Security and the Deficit

With all of the political focus on the deficit and real solutions to the deficit problem social security is once again a focus of both left and right. Of course any serious notion of deficit cutting has to address the spiraling costs of entitlements. But is social security a part of the “entitlement problem?” An interesting new debate has broken out, and as has become the norm both sides of the fight have stretched the truth (or worse).

The Bowles-Simpson deficit commission got this ball rolling, and took flak from both left and right. Lets look at the recommendations. Peter Orszag, the former Obama OMB Director, penned an op-ed that detailed the recommended changes in the New York Times.

First, it would make the payroll tax more progressive by increasing the maximum earnings level to which it applies. Over the past several decades, as higher earners have enjoyed particularly rapid wage gains, a growing share of their wages has escaped the tax because they have been above the maximum taxable level. Today, about 15 percent of total wages are not taxed. The chairmen recommend gradually raising the maximum threshold so that, by 2050, only 10 percent of total wages wouldn’t be taxed — decreasing the 75-year Social Security deficit by more than a third.

Second, Mr. Simpson and Mr. Bowles recommend indexing the age at which full Social Security benefits can be received to increases in life expectancy. This age is already increasing to 67, and under the proposal the gradual rise would continue, to 68 by 2050. A better approach would be to leave the full benefit age alone and instead directly reduce the monthly benefits as life expectancy rises, to keep average lifetime benefits roughly constant. But the chairmen’s approach would by itself narrow the Social Security gap by about a fifth.

The third suggested change is to make the formula for determining Social Security benefits more progressive, by reducing future payments to high earners while increasing them for people at the bottom. These adjustments would close at least another third of the projected deficit. And they would also help offset a little-noticed trend: affluent Americans are increasingly living longer than others. This pushes the Social Security system toward being less progressive, as higher earners collect benefits for more years.

Finally, Mr. Bowles and Mr. Simpson would have Congress adjust the cost-of-living index that’s used to determine annual increases in Social Security benefits so that it would measure inflation more accurately. Making this switch would fill in more than a quarter of the long-term deficit, because the new index would grow more slowly.

Those are the details of the recommendations, with the left making essentially two arguments. First, that these fixes, designed to shore up the system, are weighted too heavily towards “benefit cuts” and do not raise taxes enough. The second argument is the one that has triggered the latest imbroligio. The argument essentially says that Social Security is solvent through 2037 and that the fund presents no deficit issue because of that solvency. On the first issue, fixing the overall solvency issue I disagree with the notion that the Commission’s recommendations are not workable. They are, and certainly negotiations could tip the scale a bit more towards revenue, as Orszag points out in his op-ed. But I am interested in argument number two for the purposes of this post.

The argument that Social Security is solvent through 2037 is based on the accumulated surpluses of the Social Security Trust Fund, which stands at about $2.4 trillion. This surplus is not held in cash, but rather in treasury securities. The Government has essentially borrowed from itself, taking and spending the surplus and replacing it with government securities. The fund itself is about to switch over from running annual surpluses to running annual deficits, forcing it to rely on “interest” from the bonds, and eventually bond redemption, in order to pay promised benefits. Charles Krauthammer has ignited a war of words by calling into question the viability of the trust fund.

The relative ease of the fix is what makes the Obama administration’s Social Security strategy so shocking. The new line from the White House is: no need to fix it because there is no problem. As Office of Management and Budget Director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.

This claim is a breathtaking fraud.

Krauthammer alleges that the “federal IOU’s are essentially worthless.

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called “special issue” bonds.

Special they are: They are worthless.

So Krauthammer makes an incredibly important point, even though his description of the federal bonds in the Trust Fund is clearly not accurate. That point? That due to the existence of these obligations, and with the SS Trust Fund running an annual deficit, Social Security will indeed present a huge financial problem IMMEDIATELY. Recognition of that problem does not imply that there is a belief that the federal obligations, in the form of the trust fund IOU’s, will be defaulted on. You do not have to believe that to see the problem. Beyond the fact that redemptions will, by definition, immediately drive up the deficit by the amounts redeemed annually, the issue of the loss of social security purchases of treasuries must be counted as a major problem. Some reports I have seen say the Social Security Trust Fund may have purchased up to 25% of total federal debt issued in recent years. (We know they have purchased $2.4 trillion overall). So not only will the government need to finance additional debt, but a major purchaser of federal debt will now be gone. Anybody who thinks that is not a problem is really not thinking things through. And that appears to include Jacob Lew,the current OMB Director, who wrote an op-ed piece for USA Today in which he essentially sugar coated the problem. That drew the rebuke from Krauthammer, and then a further response from Lew on the OMB blog.

We are now in a very different fiscal position. When I returned to government at the start of the Obama Administration, the country faced projected deficits of more than $8 trillion over the next decade. These deficits primarily were the result of specific decisions made by the previous Administration and Congress to spend money on initiatives without finding a way to pay for them, notably the tax cuts of 2001 and 2003 and the Medicare prescription drug benefit.

This is the most important point: the problem is not with Social Security, but in the near term the mismatch between what we take in and what we spend in the rest of the budget. Working people had payroll taxes taken from their salaries to pay for future benefits, and instead the money was used to pay for tax cuts and other initiatives. It is hardly fair now to say that those working people caused the problem just when they are ready to collect benefits.

Krauthammer’s argument is inside out. We should not blame Social Security for our current fiscal problems when it is the irresponsible fiscal behavior of the past that has presented the country with future challenges to fund our commitments, including Social Security over the next two decades.

That is why in the short term, we have to honor the legal and moral obligation to keep the promises made to Social Security to repay those surpluses. Doing that entails getting our fiscal house in order. That is why the 2012 budget the President proposed includes more than $1 trillion in deficit reduction over the next decade and makes tough choices that will put the country on a sustainable fiscal path by the middle of the decade.

Funny thing is I agree with plenty of what Lew has to say in his blog post. He is correct that Social Security and its recipients did not cause the problem. He is also correct to point out that the insane fiscal policies of the prior administration took us from surplus to deficit, and have put us in the ditch. He is also correct to say that we should honor the trust fund obligations. But to sugar coat what honoring those obligations means, in dollars and cents, is not correct, in my opinion. And to say that it will not have a current fiscal impact, due to “surpluses” in the trust fund, is just intellectually dishonest.

Finally a thought on the lockbox concept for Social Security. Al Gore proposed it when he ran for President, and with all of those Treasury Securities now sitting there ready to be redeemed I have seen it talked about in media, and on other blogs. The consensus seems to be that Gore’s idea was “not workable”. And that seems to be a consensus view of both left and right. I saw one posting that said that you couldn’t park $2.4 trillion, and that of course you would put that type of money into “safe investments.” Seems to me that you certainly could have kept it in cash, WITHOUT spending it on federal government budgetary items. Hmmmm, but that would have required fiscal discipline to be applied back then, at the time this money was spent. And please spare me the lecture that Social Security is not a separate entity, and that I don’t know how the federal accounting system works. That is so much nonsense. It would simply be a reserve against future liabilities, which is encouraged and mandated at state and local levels. If those were current assets, instead of liabilities to the government, then the argument that the Trust Fund was solvent through 2037 would indeed be without debate. This is the problem with government, and why folks are reluctant to agree to revenue increases without strict controls. In order to do the right thing the numbers need to add up. Under both Democratic and Republican Administrations those numbers have not added up for some time.

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2 Responses to Social Security and the Deficit

  1. Jules Gordon says:

    Your Honor,
    I am not surprised by your solution which punishes success, increases taxes until at max capacity, and class separation. You will definitely receive the Kennedy’s award, Profiles in Courage.

    A long time ago I warned you about raising taxes to the limit. You guys did it here and look what happened when the Federal payments stopped.

    We can agree on one thing, people who are successful and can fund there own retirement should not collect social security and should NOT pay for it. That would leave free cash to help those who need it. I also want serious trouble for “poor” people who scam the system get long jail sentence.



  2. Bill Manzi says:


    The point of my post was not to discuss the revenue v cut issue, but the debate between Krauthammer and Jacob Lew. On that point I come down principally on the conservative side, as the Trust Fund is a mirage. But to go to your point on revenue you do not need to raise any revenue at all. Under those conditions you either fund the annual social security deficit by general taxation or borrowing, OR YOU CUT BENEFITS. There is no third answer. So that is the either/or we are faced with, and for those that say they don’t want to make benefit changes or raise additional money they are quite frankly out of their minds.


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