Social Security Does Not Add To The Federal Deficit

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This is not a political column, it’s a push back on the political distortion of legal and math facts about Social Security. Recently political leaders, such as the Senate leader Mitch McConnell, as Michael Hiltzik writes in the LA Times is gunning to cut Social Security benefits to reduce the federal deficit.

But Social Security can’t, by law, add to the federal deficit. Medicare and Medicaid can, but not Social Security. Social Security is self-funded.

It is correct to say that Congress added to the deficit, not Social Security . The deficit rose substantially because of the 2017 tax cut, which reduced total revenue by 5% and revenue from corporate taxes by 35%.

And because it must balance its books Social Security is prudently funded. It collects revenue and saves for expected costs. Currently, Social Security has a $2.8 billion trust fund built up by the boomer generation paying more in taxes than needed to pay current benefits. The trust fund is a vital way workers save for retirement. With tax revenues and earnings and principal from the trust fund Social Security is estimated to be solvent until 2034, after that if it doesn’t get more revenue Social Security will only pay 77% of promised benefits.  Social Security can’t add to the deficit because it pays for itself. If revenue fall short, benefits are cut.

And if you are wondering if the trust fund is real here are facts to judge yourself. Workers do two things with their FICA taxes – we pay current benefits and we save by buying U.S. treasury bonds like many wealthy people, endowments, pension funds, foreign countries, and foreign investors buy U.S. treasury bonds. U.S. treasury bonds are highly sought after by savers all round the world.  For many reasons the U.S. enjoys an exorbitant privilege of all countries considering dollars the safest currency.

When we, through Social Security, invest in government bonds, the government creates intragovernmental debt, when the Yale endowment buys the bonds the government creates external debt. And just like all trust funds when the Social Security Administration draws on the trust fund to pay its bills it sells the bonds.

The U.S. can’t practically decide to default on Social Security’s bonds or anyone else’s U.S. treasury bonds. Defaulting would “save” money for the government, but countries, like Argentina, default, not the U.S.  It is hardly correct to say Social Security is “adding” to the deficit any more than any other holder of a Treasury bond. I disagree with the view that the Social Security indirectly contributes to the on-budget deficit because the interest payments it receives from the general fund are on the unified budget and receives funding from income tax revenue on Social Security benefits, which is technically on-budget.

The money you pay for Social Security through the FICA contribution is not the money you get out, you are paying mostly for the benefits of people receiving Social Security today. But for decades since 1983 workers were putting money in a “savings account” – the Social Security trust fund.

Other politicians— Rick Perry and Senator Ted Cruz — called Social Security a Ponzi scheme, which reveals a misunderstanding of Social Security finances and Mr. Ponzi’s 1920 investment fraud swindle – when Mr. Ponzi definitely spent more than he took in.

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