Nothing is more out of fashion in political and financial circles that a discussion of the federal deficit. Things have now deteriorated to the point where your correspondent can attend the Hayek Prize lecture at the “fiscally-conservative” Manhattan Institute and not hear the word “deficit” once. Somehow, the prospects of continuous trillion-dollar annual shortfalls (during alleged good economic times!) fail to evoke anything more than a vague sense of disquiet among even the most ardent sound-money types. At the same time, however, there is general consensus among the punditocracy that Social Security is “in trouble” and that something—that is, benefit cuts and/or tax increases—must be done to “ensure that it is around for our retirements.” This is, we are told (most often by those with comfortable pensions from other sources) that Social Security must “pay for itself.” But why in the world should that be? Nothing else that the federal government does “pays for itself’ nor is it likely to in the future.
So let’s look at Social Security—how “bad” is it, and how “bad” will it get? First, off we must define what we mean by “Social Security.” For purposes of this discussion, we will use the term to mean a combination of the Old Age Security (OAS) and Disability Insurance (DI) programs, both of which are funded by a flat 12.4% tax on wages and salaries (up to $132,900 in 2019). This tax is split evenly between employees and employers; self-employed workers pay both halves.
Social Security is commonly described as operating as an independent “trust fund” with a dedicated source of income and a distinct expenditure. However, this is an accounting fiction. Unlike the operations of a “normal” pension fund, payroll taxes are not separated and held in an independent account at a financial institution. Instead, the Treasury estimates how much withholding tax should have been allocated to OASDI, and makes a book entry of a “contribution” into the Social Security Trust Fund (SSTF). It then uses this money to “purchase” Treasury bonds for the SSTF. If this sounds like lending money to yourself, that’s because it is. To date, the government has collected $2.9 trillion more in taxes for OASDI than it has send out to beneficiaries—thus, the SSTF has a “balance” of this amount. In reality, the trust fund in nothing but an “IOMe.” Likewise, beneficiary payments are made from directly from the federal government’s account at the Federal Reserve Bank and not from an account dedicated to OASDI.
The most relevant budgetary numbers for OASDI are the money it sends to beneficiaries and the amounts it takes in through payroll taxes. However, there are two other sources of income for OASDI which must be mentioned. The first is the amount received by the taxation of Social Security benefits as part of the normal, Form 1040 income tax process. (This essentially amounts to a means-tested reduction in benefits—although since taxation starts at total incomes of $25,000 for singles and $32,000 for couples one might say that the “means-testing” applies to some pretty low levels.) In 2018, the revenue from taxation of benefits was calculated to be $35 billion–although once again this is an estimate since the money is received with 1040 filings and is not broken out on the form. The second source is interest on the bonds held by the SSTF—a purely bookkeeping exercise. Discussions concerning OASDI’s balance of income and expenditure must consider the ambiguous nature of the SSTF and the “interest” it earns. For the purposes of this commentary, we will include the taxation of benefits in OASDI income but exclude “interest” on the SSTF.
In 2018, the federal government sent out $989 billion in OASDI benefits but only collected $920 billion in corresponding payroll taxes and taxation of benefits. Thus, the cash flow deficit for OASDI amounted to $69 billion, or a 7% deficit. This may sound alarming, but consider that the government as a whole spent 19% more than it took in, meaning that all fiscal operations other than OASDI only collected 77 cents for every dollar they spent.
And in spite of the retirement of the Baby Boomers, projections of future OASDI deficits are not that bad in the context of the rest of the deficit—only a $246 billion cash-flow shortfall by 2028, or 14%. Unless something changes drastically, by that time a quarter-trillion dollars of red ink will hardly be noticeable in the ocean of the deficit. One might suppose that those decrying the “insolvency” of Social Security might turn their immediate attention to the portion of the budget which is producing the rapidly expanding shortfall, but one would suppose in vain.
The bottom line is this: if trillion-dollar annual deficits are going to cause problems, those problems will manifest themselves well before Social Security runs a significant deficit. On the other hand, if Modern Monetary Theory is correct and these deficits are not a problem, then Social Security’s future negative cash flow should not be a concern either.
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