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Social Security hasn’t added a dime to the federal budget deficit, so why should Social Security reform even be on the table for the budget deal that, sooner or later, must be reached? We’ve heard that question again and again, from the seniors’ lobby to liberal activists to Congressional Democrats, and if true it would be compelling. But unfortunately it’s not true. Social Security—like other government programs facing funding shortfalls—adds to the deficit and should be brought back into balance, and there’s no time like the present to do it.
Social Security faces unfunded liabilities of $8.6 trillion over 75 years, according to its trustees. And today, Social Security contributes $165 billion to the overall budget deficit, thanks to the payroll tax cut, a slow economy and Baby Boomer retirements. It seems natural that Social Security might enter into any budget agreement, and indeed President Obama and House Republicans discussed Social Security reform as part of an aborted debt-ceiling package in 2011.
“And today, Social Security contributes $165 billion to the overall budget deficit, thanks to the payroll tax cut, a slow economy and Baby Boomer retirements.” -Andrew G. BiggsAt this, the political left erupts. In late September, 29 Senate Democrats signed a letter opposing Social Security benefit cuts, for either current or future retirees, as part of any budget deal. Senate Majority Leader Harry Reid said, “Social Security has contributed not a single penny to the deficit. So we can talk about entitlements as long as you eliminate Social Security.” The AARP is nine cents less hardline, with CEO Barry Rand merely claiming, “The fact is, Americans pay for Social Security, and it hasn’t added one dime to the deficit.”
If this is a fact, it’s one at variance with both standard budget accounting and, indeed, AARP’s own analysis of the budget.
Budget wonks use two main measures of the budget deficit: the “on-budget” balance, which includes everything except Social Security and the postal service, and the “unified budget,” which merges the on- and off-budgets together. If, for example, the on-budget was running a deficit of $100 billion while the off-budget ran a surplus of $100 billion, the unified budget would be in balance.
The unified budget approach is by far the most common for both budget wonks and the media. As a 2005 AARP policy analysis stated, “The [Congressional Budget Office], the U.S. General Accounting Office, and other agencies that produce budget documents and analyses think that the unified budget concept gives the most complete picture of total federal revenues, spending, surpluses, and deficits.” When you read that the Obama White House projects a 2013 budget deficit of $901 billion, that’s the unified budget deficit they’re referring to.
And on a unified budget basis, when Social Security’s financial position worsens the budget deficit grows. Social Security today contributes about $53 billion to the budget deficit—$165 billion if we include the temporary payroll tax cut designed to stimulate the economy—rising to $100 billion by 2020 and never looking back. It’s as simple as that. Is Social Security the main driver of today’s $1.3 trillion unified budget deficit? Of course not, and no one said it is. But it’s not pennies or dimes either, as the left would have you believe.
This accounting of convenience can be seen in two contrasting statements by Rep. Xavier Becerra (D-CA), the ranking Democrat on the House Social Security subcommittee. On passage of the 2010 Affordable Care Act, Becerra declared “The health reform legislation passed today will cut the deficit by $143 billion over the first ten years…” That’s the unified budget deficit he’s referring to, which counts almost $30 billion in new Social Security revenues generated as a result of Obamacare. But Becerra shifted to on-budget accounting in a 2011 hearing claiming that “Social Security has never contributed a dime to the nation’s $14.3 trillion debt, not a penny to our federal deficit…” You can’t have it both ways.
In the end, Social Security is similar to other federal programs—the government collects money in a given year and it pays it out the same year. The trust funds have an important legal meaning, in that benefits will automatically be paid if the trust fund has a positive balance and automatically be cut once the trust funds are insolvent. But economists generally reject the claim that Social Security has pre-funded its future benefits in a broader economic sense, such that the trust fund would actually make it easier to pay future benefits. It won’t.
Congress shouldn’t change Social Security rules precipitously—after all, older Americans have made their retirement plans and reform shouldn’t pull the rug out from under them. But most reforms would be implemented only gradually. For instance, President Obama’s fiscal commission recommended raising the retirement age to 69 for people born in 2013. The idea that Social Security reforms would play a major role in reducing today’s deficit is simply wrong.
Members of Congress and the seniors lobby may not even be aware that their claims regarding Social Security and the budget deficit are inconsistent and misleading. More likely, they saw a talking point that was simply too good to say no to.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.
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