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Did a Social Security story go too far?

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If I ever had doubts that Social Security is the proverbial third rail of American politics, they were dispelled this week by readers who criticized a front-page story last Sunday on the subject by Post economic policy reporter Lori Montgomery.

Paul Krugman, the Nobel Prize-winning economist and columnist for the New York Times, criticized the story in his blog, saying it was “negative journalistic value added.” Dean Baker, an economist and co-founder of the Center for Economic and Policy Research, said on his “Beat the Press” blog that the story “discards all journalistic standards.” And dozens of readers said the story was misleading, inaccurate and intended to sensationalize, not to analyze.

I spent a couple of days last week talking to Social Security experts across the ideological spectrum. Some, mainly those on the left, didn’t like the story, while those on the right did. But some in the middle, like Jonathan Cowan of the Third Way, declared it realistic and on point.

I thought the story had a few declarative sentences that tried too hard to be definitive when, in fact, experts disagree about those points. I thought the Social Security trust fund mechanism could have been explained in more detail. And one set of figures deep in the story—about how much retirees pay in and how much they get out — was misleading or at least confusing because it included Medicare benefits, which were not a part of the story.

It’s important to note that this story is part of a series, called “Running in the Red,” that seeks to explain the origins and consequences of the country’s rising debt. The Post started it after the debt-ceiling conflict erupted between President Obama and congressional Republicans in the spring.

Now for the points of this story. Did Social Security “pass a treacherous milestone” in 2010 and go “cash negative,” as Montgomery wrote in her lead? I’m not sure a milestone can ever be treacherous — the path after it might be — but the demarcation point is well, just that.

Social Security did reach a turning point in 2010. Until then, payroll taxes produced enough annual revenues (“cash” in Montgomery’s parlance) to pay current retirees.

The huge number of baby boomer retirees will continue to be paid largely with payroll taxes, plus — very important — the proceeds from $2.6 trillion in government bonds. The Social Security Administration bought these bonds from the Treasury during the years when the trust fund was intentionally building up a surplus of payroll tax receipts because the baby boomers hadn’t started to retire.

The 1983 reforms to Social Security, agreed to by Democrats and President Reagan, designed it this way. It’s working precisely as planned. These bonds are a sovereign obligation by one part of the government, the Treasury, to pay an institutional investor, the Social Security Administration, which is another part of the government. It’s an obligation to one and an asset to another. That’s why the trust fund is in balance and does not contribute to annual deficits. Retirees will get their benefits, at least through 2036, unless the Treasury defaults, which isn’t going to happen.

However, with the payroll tax holiday enacted by Congress and signed by President Obama last year to boost the economy, less money is coming in. That law required this new gap to be covered not from the trust fund, but from the government’s general fund. That’s why Montgomery wrote that Social Security is now sucking money out of the Treasury. It is.

And, because more people are out of work and for longer periods in this financial crisis, payroll taxes are lower than planned. That puts more pressure on the trust fund to make up the gap in payments to current retirees by using the interests and proceeds from the bonds earlier and faster than anticipated in 1983. That’s why, at some point, Social Security will have to be addressed; otherwise the the fund will evaporate in 2036.

And the more the bond proceeds have to be used, the more impact this has on the government’s ability to borrow money.

So, is Social Security part of the government’s debt problem? Yes, it is, ultimately. Is it a major contributor? No, not in the short run, relative to other debt and tax issues, a point the story should have made clearer.

But as the inexorability of demographics unfolds, and more baby boomers retire, and the country’s declining birth rate produces fewer replacement workers who pay the payroll tax, the trust fund will dry up more quickly and a fix to Social Security will become more necessary. That’s the truth, and it’s why The Post, appropriately, did the story.

Patrick B. Pexton can be reached at 202-334-7582 or at ombudsman@washpost.com.

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