November 1, 2018 / 10:01 AM / 14 days ago

COLUMN-Social Security and the U.S. deficit: Separating fact from fiction

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Mark Miller

CHICAGO, Nov 1 (Reuters) - For decades, some of our most prominent U.S. politicians have been sounding the alarm that Social Security is an important driver of the federal budget deficit. But is that really true?

U.S. Senate Majority Leader Mitch McConnell, a Republican, recently pointed to “entitlements” as the key cause of rising federal deficits, and blamed Democrats for refusing to go along with proposals to cut spending by Medicare, Medicaid and Social Security.

McConnell was responding to a report from the U.S. Department of the Treasury last month that the budget deficit grew to $779 billion in fiscal 2018, the highest in six years. Treasury attributed the increase to the tax cuts contained in the Tax Cuts and Jobs Act (TCJA), higher spending and rising interest payments. (reut.rs/2CNjSBm).

The call for cuts to our very popular entitlement programs just before an election makes for surprising politics - and it is not selling well with the public; a poll this week by NPR, PBS NewsHour and Marist (bit.ly/2zewazj) found that 60 percent of Americans would prefer to reverse the tax cuts than cut spending on Social Security, Medicare and Medicaid.

But is there substance to McConnell’s argument?

You can make a case that rising spending on Medicare and Medicaid contribute to deficits, since both depend partially on federal general revenue. I would counter that the rising cost of these programs reflects a general problem with rising healthcare costs that affects not just government, but employers who insure workers and individuals buying their own insurance.

But it is quite a stretch to argue that Social Security drives deficits.

By law, Social Security cannot contribute to the federal deficit, because it is required to pay benefits only from its trust funds. Those, in turn, are funded through a dedicated payroll tax of 12.4 percent of income, split evenly between employees and employers, levied on income (this year) up to $128,400.

The program’s revenue and expenses are accounted for through two federal trust funds that have operated with large and growing surpluses in recent years, and they finished fiscal 2018 with an estimated $2.89 trillion. By law, Social Security must invest these surplus funds only in special-issue U.S. Treasury notes, which have the same full faith and credit guarantee as any other federal bond.

LONG-RANGE OUTLOOK

Going forward, the trust fund surplus will be drawn down as an aging population claims benefits, and as the U.S. fertility rate continues to decline, which means fewer workers are coming along to pay taxes into the system.

That already is starting to happen. In fiscal 2018, expenditures exceeded revenue (including interest on investments) for the first time since 1982. Social Security took in $912 billion in fiscal 2018 and spent $991 billion. The difference - $79 billion - came from repayment of interest on those Treasury notes. Some conservative policy analysts point to that payment as evidence that Social Security is a cause of deficits, since the $79 billion payment came from general revenue.

“We can call that $79 billion an interest payment on past borrowing - fine,” said Brian Riedl, senior fellow at the Manhattan Institute, a conservative think tank. “Social Security in the past ran annual surpluses and lent that surplus money to the Treasury. In those years, the existence of Social Security reduced the federal budget deficit. Today, it is relying on a cash infusion from the Treasury to pay full benefits.”

Riedl’s point is technically correct. But in this sense, Social Security is no more a cause of the deficit than any other holder of U.S. Treasuries, be it Wall Street or the Chinese government. “Government needs to raise a certain amount of money unless it balances its general fund,” said Nancy Altman, president of Social Security Works, an advocacy group.

“If it doesn’t do that, it issues bonds - the only question is, who buys them?” said Altman.

A second argument that Social Security contributes to deficits is related to the longer-run outlook for the program. The trust funds are projected to be exhausted in 2034; at that point, incoming revenue would be sufficient to continue paying only about 75 percent of promised benefits.

We might or might not reach that point - we could eliminate much of this long-range shortfall by gradually increasing payroll taxes and raising the cap on covered income. Or we could reduce benefits by further increasing the full retirement age, or craft some combination of tax increases and benefit cuts.

Other creative options could include permitting the Social Security trustees to invest a modest portion of reserve funds in equities, or to levy a tax on financial services. From where I sit, the smart move is to bolster the program with higher revenue to close the shortfall and expand benefits.

But deficit hawks point to the 2034 exhaustion date to argue that the government would have to make up any shortfall and continue paying full benefits. The argument here is that Congress would never allow a huge cut to Social Security benefits in light of the program’s popularity and the importance of benefits; if the trust fund were to run dry, lawmakers would simply make up the difference out of general revenue.

But the assertion that we will reach the 2034 benefit cuts is speculative. Congress may craft a solution ahead of that date, or it may not.

Even more speculative is the question whether general revenue would be tapped if we do reach the 2034 exhaustion doomsday scenario. The long-range budget forecast by the Congressional Budget Office assumes this would happen - but not because the nonpartisan congressional budget scorekeeper has an opinion one way or the other. Federal law requires the CBO to assume that payments for some mandatory programs would continue to be fully funded in this situation.

What would the Social Security Administration actually do if the trust fund were exhausted? The answer is not clear, according to recent analysis by the Congressional Research Service. It could continue paying benefits on a delayed schedule or cut payments. And beneficiaries might take legal action to claim full benefits, since Social Security is a legal entitlement.

One hopes that these questions will never be answered, because exhaustion would be a real mess. But we can get the answer to the question of whether Social Security drives the deficit right now: No. (Reporting and writing by Mark Miller in Chicago Editing by Matthew Lewis)

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