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Government: How bad is the news about Social Security?

May 13, 2011 |  7:47 pm

Michael Astrue The trustees who oversee the fiscal health of Medicare and Social Security issued another gloomy report  Friday about the long-term finances of the two programs. The Medicare trust fund for hospital care is now projected to run out of money in 2024, five years earlier than last year's estimate. The Social Security trust fund fared a bit better -- it's projected to be exhausted in 2036, only one year sooner than previously estimated.

The programs' costs are affected by so many variables that any long-term projection is likely to be suspect. Nevertheless, it was a little jarring to see the reaction  from the Strengthen Social Security Campaign, a left-of-center coalition. The release cites "two critical findings" in the report: that the Social Security program is "projected to have a surplus of $69.3 billion in 2011," and that the program is "projected to be able to pay all benefits until 2036."

The group went on to say:

This data shows that Social Security is not in crisis. It also does not contribute to the federal deficit. By law, Social Security cannot borrow and it cannot make benefit payments if it lacks the revenue to cover them. Its only recourse is to cut benefits. That is why Social Security should not be part of any deficit-reduction deal.

The trustees might beg to differ about whether the program is in "crisis." The long-term gap between payroll tax revenue and the benefits promised to retirees is so severe, their report says, that closing it would require Congress to cut benefits 14%, raise Social Security taxes 17% or find an equivalent alternative. And as Treasury Secretary Timothy Geithner noted, the magnitude of the required changes will only grow if Congress waits. If it does nothing by 2036, benefits would drop an estimated 23%.

The campaign's preferred response to the "long-range funding gap" is to apply payroll taxes to every dollar in wages, rather than capping the amount subject to taxation at $106,800. That tax hike would affect only 6% of the population, the group said, and would close the gap "relatively painlessly." I suspect that those workers wouldn't see the change as quite so painless, given that it would force them and their employers to collectively pay the feds $12.40 out of every $100 in salary they earned above the current cutoff.

But the campaign's main point is that any debate over how to close the funding gap should wait until after lawmakers come up with a budget deal and raise the debt ceiling. This, again, reflects its view that Social Security does not and cannot contribute to the federal deficit. Whether they're right about that, however, depends on which definition of the deficit you use. The one relied on by the White House and Congress is the difference between the revenues coming into the government and the cash flowing out. And by that measure, Social Security is contributing to the deficit -- in a small way today, and to a much greater extent in the 2020s and 2030s.

That's because the "unified budget" doesn't recognize the interest earned by the reserves in the Social Security trust fund as income because it's money paid by one governmental entity to another. That ignores $115 billion in earnings that the trust fund is projected to collect this year. So when payroll tax revenues fall below Social Security benefit payments, as they did last year and are expected to do again this year, that amounts (in the eyes of budgeteers in Congress and the White House) to an increase in the deficit.

Is that a fair accounting? Not really. I'm sympathetic to the argument made by Nancy Altman, co-chair of the Strengthen Social Security Campaign, that the unified budget obscures the true federal deficit. And arguing that Social Security is in the red ignores all the assets in the Social Security trust fund. That fund holds real reserves: special Treasury notes that are certain to be honored, just like any other Treasury security. They're also just about the safest investment known to man. By the same measure, the interest earned by the trust fund's reserves is just as real. 

Nevertheless, when the Congressional Budget Office or the White House's Office of Management and Budget talk about "the deficit," it's the unified budget number. That means if payroll tax receipts are higher than benefit payments, the number goes down. And if those receipts are lower than benefit payments, the number goes up -- regardless of how large the Social Security trust fund might be and how much interest its Treasury notes are accruing. 

Here's another way to think about the issue. Assume that the federal government somehow magically has balanced its budget, excluding Social Security, in 2023. That year, the trustees report says, Social Security will have to start cashing in the trust fund's reserves to meet the demand for benefit payments. To do so, it will have to redeem some of the special Treasury notes, which means borrowing the money from somewhere else. This borrowing wouldn't increase the total amount of government debt;  it's just trading one set of lenders for another. Nevertheless, it would be count as deficit spending under the unified budget because it would transform intragovernmental debt into public debt.

This is a debate over accounting semantics, but it's an important one. Because Social Security makes up such a large percentage of federal spending -- about 20%  -- advocates fear that lawmakers will be tempted to cut benefits to help solve the deficit problem. In fact, several deficit-reduction plans include proposals to raise the age at which people can collect full Social Security benefits. That's why groups such as the Strengthen Social Security Campaign have argued so forcefully that Social Security doesn't contribute to the deficit and so shouldn't be part of the solution. And they're right in one very important respect: Social Security isn't responsible for the growing long-term gap between federal revenue and spending. That's mainly a function of rising healthcare costs (e.g., Medicare and Medicaid). 

Of course, the deficit isn't the only reason to reconsider such things as the retirement age. In an interview, Eugene Steuerle of the Urban Institute noted that changing demographics are challenging the country in several important ways. When people retire at age 62 or 64, "it creates an enormous set of reactions," Steuerle said. These include a smaller workforce, lower economic output, lower personal incomes and reduced tax revenues. Those effects may not justify raising the retirement age, but policymakers shouldn't ignore them.

RELATED:

Social Security and Medicare: An honest debate, now

Tim Rutten: Ryan's budget blueprint would push the aged into poverty

Doyle McManus: The choice between low taxes vs. Medicare benefits

-- Jon Healey

Photo: Social Security Administration Commissioner Michael Astrue, speaking to reporters Friday. Credit: Alex Wong / Getty Images

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