In fund we trust â not
In my column last month, I wrote about the federal budget deficit and touched on the role Social Security and its so-called trust fund play.
I know from a number of groups I’ve spoken to that many of you still trust in that trust fund and feel that Social Security will remain solvent for years as a result of it.
There wasn’t space in my column last month to elaborate on why I believe that not to be true, so I was planning to address the subject this month. But in the meantime, Stephen Ohlemacher of the Associated Press wrote an article that I think explains the situation very well.
I therefore cede the balance of my space to his analysis. I hope you find it edifying. Please share your thoughts on the topic by submitting a letter to the editor via mail or e-mail.
In the midst of the budget crisis, an old debate has broken out with new force: Should Social Security be seen as part of the deficit that Washington needs to rein in?
The White House is balking at calls to tackle Social Security’s financial problems now, before baby boomers swamp the system. But the massive retirement program, like the rest of the government, is running a deficit and has become part of the argument on Capitol Hill.
Older adults and the disabled don’t need to worry about losing their benefits or seeing them cut anytime soon. The Obama administration is correct in asserting that Social Security doesn’t face an immediate crisis.
But the program’s red ink will only get worse the longer policymakers don’t act. Last year’s $37 billion operating deficit — the first since the system was last overhauled in the 1980s — is expected to grow to $45 billion this year.
Over the next decade, the program is projected to run up more than $500 billion in operating deficits if Congress doesn’t act, according to the nonpartisan Congressional Budget Office.
White House officials and some Democrats in Congress say not to worry: Social Security has built up a $2.6 trillion surplus over the past 30 years.
“Social Security benefits are entirely self-financing,” White House budget director Jacob Lew wrote in a recent article in USA Today. “They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.”
That argument, however, overlooks a nagging fact: The money in the trust funds has already been spent over the years to help fund other government programs. In return, the Treasury Department issued bonds to Social Security, which earn interest and are backed by the government, just like bonds sold in public debt markets.
When Social Security runs a deficit, it redeems its bonds with the Treasury Department to cover the red ink. But Treasury gets the money to pay Social Security the same places the government gets all its money: either from taxes and other revenues or by borrowing it.
No real assets
Here is how Lew described the Social Security trust funds when he was budget director under former President Bill Clinton, in Clinton’s 2000 budget request:
“These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. (emphasis added) Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”
Few on Capitol Hill are suggesting that the federal government won’t make good on its IOUs to Social Security. But now that it is time to start repaying Social Security, Lew’s decade-old analysis of where the money will come from still holds true.
Advocates for Social Security say the program is being unfairly blamed for the budget deficit, and they worry that benefits could be put on the chopping block.
They correctly argue that Social Security did not cause the nation’s fiscal problems. For the past 30 years, when Social Security posted big surpluses, the program actually reduced the amount of money the federal government had to borrow on public debt markets.
The problem, as Lew points out, is that the rest of the government has been running up big budget deficits, including a record $1.5 trillion deficit this year. The national debt now tops $14 trillion, which includes the $2.6 trillion owed to Social Security.
A problem that will grow
In the short term, Social Security is suffering from a weak economy. Payroll taxes that finance the program are down and applications for benefits are rising because fewer people are working.
Over the next 19 years, Social Security will be further pushed into deficit by the 68 million baby boomers retiring and applying for benefits, even as payroll tax revenues decline due to a shrinking workforce.
“We can either wait and have huge problems, and [Social Security] won’t be here for my kids and grandkids, or we can address it now, make relatively small changes, and make sure that it’s going to be safe for the next 75 years,” said Erskine Bowles, who served as chief of staff under Clinton and co-chaired the recent deficit commission under Obama.
“I think this is all about politics now,” Bowles said, “because I haven’t met anybody here on the left or the right that doesn’t see the arithmetic.”