Social Security and its role in the nation’s debt
“As I’ve said, Social Security is not the primary driver of our long-term deficits and debt.”
— President Obama, July 11, 2011
“Social Security has never contributed a dime to the nation’s $14.3 trillion debt…not one penny to our federal budget deficit this year or any year in our nation’s history.”
— Rep. Xavier Becerra (D-Calif.). July 8, 2011
President Obama, at a news conference Monday, continued to press for the “biggest deal possible” that would combine spending cuts and new tax revenue in order to reach an agreement on raising the debt limit. He made it clear that some sort of tinkering with Social Security could be on the table.
“It’s not an option for us to just sit by and do nothing,” Obama told reporters. “And if you’re a progressive who cares about the integrity of Social Security and Medicare and Medicaid, and believes that it is part of what makes our country great that we look after our seniors and we look after the most vulnerable, then we have an obligation to make sure that we make those changes that are required to make it sustainable over the long term.”
That kind of talk has some Democrats nervous. Rep. Xavier Becerra, vice chair of the House Democratic Congress, made a declarative statement last Friday that Social Security has “never contributed a dime” to the national debt, “not one penny” to the budget deficit this year. He feels so passionate about this fact that, after the Fact Checker called his office about the statement, Becerra immediately got on the phone himself to defend it, saying it does not deserve any Pinocchios.
Obama, in his news conference Monday, put it a little differently, saying, “Social Security is not the primary driver of our long-term deficits and debt.” That phrasing would suggest it contributes in some way to long-term deficits and debt, though not in a substantial way. Obama indicated he was focused on the future: “The reason to do Social Security is to strengthen Social Security to make sure that those benefits are there for seniors in the out-years,” he said.
So what’s going on here?
Social Security was created in response to the pervasive poverty during the Great Depression. It is designed to provide workers with a basic level of income in retirement, as well as disability and life insurance while they work. Just over 60 percent of the 54 million beneficiaries are retired workers; the rest are disabled workers, dependents or survivors.
The benefits are progressive, meaning lower-income workers get a relatively better deal than higher-income workers; however, workers making above a certain salary ($106,800 this year) don’t have to pay as much of their income into the system. The benefits are inflation-adjusted, a feature that is almost impossible to find in the U.S. annuity market.
About 96 percent of workers must pay a certain amount of their paycheck to the system, an amount that is matched by their employers. (Some state and local workers don’t participate in Social Security; normally the employee rate is 6.2 percent of salary, but it was reduced to 4.2 percent this year as part of a “payroll tax holiday”.)
Social Security is a pay-as-you-go system, which means that payments collected today are immediately used to pay benefits. Until recently, more payments were collected than were needed for benefits. So Social Security loaned the money to the U.S. government, which used it for other things. In exchange, Social Security received interest-bearing Treasury securities. The value of those bonds is now about $2.6 trillion.
Wait, some of you are saying now, those bonds are just “worthless IOUs.” Please put that thought aside now. We will get back to it later.
The key to understanding what’s going on now is a Congressional Budget Office document that shows the flow of money in and out of the Social Security funds. Becerra looks at this document and sees income of $805 billion and total outgo of $733 billion, for a surplus of $72 billion.
But another part of that chart shows what it calls “primary surplus.” That line item shows a deficit in 2011 of $45 billion. Becerra dismisses that figure, urging a look at the footnote: “Primary surplus is the surplus excluding interest paid to the trust fund.”
How is the interest paid? In more bonds. So primary surplus essentially means cash flow. After years of running a cash surplus, Social Security now has a negative cash flow. And that means the Treasury this year has to go into the private market and issue bonds to investors on Wall Street and overseas to pay that $45 billion in benefit payments — and also issue more bonds to Social Security to pay for that interest.
The bonds held by Social Security are backed by the full faith and credit of the U.S. government. (IOU is actually just another way of saying bond.) In theory, no president or Congress would risk defaulting on these bonds because it would ruin the nation’s financial standing.
The bonds are a real asset to Social Security, but — here’s where it gets complicated — they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt.
The action taken really depends on the resources available at the time. There is nothing particularly unusual about this, except that the U.S. government is better placed to make good on these obligations than virtually any other debt-issuer.
To some extent, this is a matter of theology.
Beccerra looks at the pile of $2.6 trillion in assets built up by Social Security, and says, correctly, that Social Security did not add to the debt; it is indeed a creditor to the United States. “I’m obviously concerned the federal government has to pay its debts, but it pales in comparison to the trillions the federal government has taken and borrowed from Social Security,” he said. (He also provided a fact sheet laying out his case.)
But others can look at the same numbers and say this is just paper-shuffling among different parts of the U.S. government. There may be a legal — and moral — obligation to make good on the benefits promised to Social Security beneficiaries, but ultimately what matters is whether the system is running a positive cash flow.
We come down somewhat in the middle on this debate. The fact that the system is running a negative cash flow now — and the foreseeable future — is an important warning sign of fiscal imbalance.
And what did the president mean when he said Social Security was “not a primary driver” of the debt?
“The Social Security Trust Fund is running a surplus, continuing to build up assets, and projected to be solvent for decades. However, the system does face a long-term shortfall,” said Kenneth Baer, senior adviser and communications director at the White House budget office. “That shortfall adds to the federal government’s overall fiscal imbalance, but it is not a primary driver of it. The President is committed to strengthening the Social Security system and eliminating that shortfall so that the Social Security system is stable and secure for generations to come.”
The Pinocchio Test
Becerra is sincere in his convictions and his statement is true, so far as it goes. Yes, Social Security in the past has not contributed to the nation’s debt. But it’s basically a meaningless fact and actually distracts from the long-term fiscal problem posed by the retirement of the baby boom generation and the shrinking of the nation’s labor pool.
We are going to label this with that relatively rare rating: “true but false.” (Still need to get an icon!)
True But False