Updating a ruling: Social Security and its role in the nation’s debt
By Glenn Kessler,
“Social Security has not added one penny to the deficit.”
— Sen. Richard Durbin (D-Ill.), Nov. 27, 2012
In 2011, we evaluated a similar statement about Social Security and gave it a relatively rare rating — “true but false” — which seemed to please no one. Yet as the “fiscal cliff” negotiations have heated up, Democrats have once again been using this talking point to shield Social Security from the chopping block.
Durbin, to his credit, in a speech to the Center for American Progress this week, acknowledged that Social Security’s long-term financing is an important issue that cannot be deferred. He advocates creating a commission that would separately address how to ensure 75 years of solvency to the program. So we don’t mean to pick on Durbin since plenty of Democrats in recent days have made similar comments.
But we remain troubled by the reemergence of this talking point, especially given the further decline in Social Security’s finances in the past year. We do not think this line is a slamdunk falsehood, as some believe, but it is certainly worth revisiting.
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, which in effect masked the overall size of the federal budget deficit. In exchange, Social Security received interest-bearing Treasury securities, which now total more than $2.7 trillion.
As we have repeatedly explained, the bonds held by Social Security are backed by the full faith and credit of the U.S. government. 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.
So what is happening today? The Congressional Budget Office tracks the flow of money in and out of the Social Security fund, and below is a summary of the data for fiscal 2013. To keep things simple, we will include transfers made for the payroll tax holiday as part of “other income.”
Social Security Income (in billions of dollars)
Other income 70
Total income 854
Total outgo 819
This looks like surplus, worth about $36 billion after rounding.
But notice that fully $110 billion of the income was interest on Treasury securities. But that interest is simply paid with new Treasury bonds. So when that money is subtracted, the actual cash flow (what the CBO document calls “primary surplus/deficit”) is negative — and getting worse.
In 2012, the cash flow deficit was $58 billion. In 2013, it will be negative $75 billion — and then negative $82 billion in 2014. By 2016, the trust fund for disability insurance will be exhausted, so in theory, full disability benefits could not be paid.
As we noted before, this is partly a matter of theology. Democrats look at those trust funds and see actual assets, built up over time, that must be honored.
In their view, the general fund — which is now making payments to Social Security to cover the cash flow shortfall — has benefitted greatly over the past 30 years from annual Social Security trust fund surpluses that were invested in Treasury securities. In other words, Social Security has helped finance deficit spending in the rest of government – rather than contributing to those deficits. So any cash flow problem should be viewed as a deficit in the general fund rather than in Social Security.
The counter-argument is that this is just paper-shuffling among different parts of the U.S. government.
Ultimately, those bonds are part of the overall U.S. national debt. In other words, it doesn’t matter what happened in the past with Social Security monies; what matters is whether Social Security is generating enough money today to pay for its bills on its own. The plain fact is that it is not, and thus it adds to government’s overall fiscal imbalance.
For instance, the White House budget documents (see Table S-4) show that on an annual basis, Social Security outlays exceed Social Security payroll taxes, thus boosting the bottom line federal deficit. (Indeed, President Obama is often careful to say that Social Security is “not the primary driver” of deficits and the debt, suggesting that he understands it does play some role.)
“We come down somewhat in the middle on this debate,” we wrote last year. “The fact that the system is running a negative cash flow now — and the foreseeable future — is an important warning sign of fiscal imbalance.”
Durbin’s office declined to comment.
The Pinocchio Test
We try to avoid ruling on opinions, and to some extent this is a matter of opinion. But given the further decline in Social Security’s cash flow position in the past year, we are going to revise our ruling in this case and deem this “not one penny” talking point worthy of a Pinocchio.
Democrats are relying on sleight of hand to potentially mislead voters about the long-term financing of Social Security. To some extent, they are trying to wall off discussion of Social Security from a debate over solving the “fiscal cliff.” That may be appropriate, but that does not excuse this language.
Some readers might question why we are only giving One Pinocchio, which is for “selective telling of the truth” but “no outright falsehoods.” In part, that is because Durbin in his speech did immediately warn the issue could not be pushed aside and ignored—and even proposed action that could be taken. The ruling might be harsher in another context.
This is a complex issue. We will be watching closely how Democrats frame it in the future.
(For more on Social Security, read our popular primer on the program.)
Check out our candidate Pinocchio Tracker