A Hypothetical Debate on Social Security

A new article from Jeffrey Brown of Forbes succinctly captures much of the debate around the findings of the Social Security Trustees report. In many ways, the debate surrounding Social Security boils down to whether you view it as a stand-alone program or one that is part of the overall federal budget. We have devoted a full analysis on the two ways to view the program -- and as we said in that analysis and our overview of what the program's own Trustees said the other day, the implications from both are clear: we must reform the program, and soon.

To understand how these two views play out, Brown engages in an interesting hypothetical debate between CRFB and the National Academy on Social Insurance (NASI) on the fiscal position of Social Security. While we cannot speak for NASI, Brown articulates our preferred view quite well. Here is a snapshot:

So here is the key question.  Should the interest that Treasury is paying to the Social Security trust funds be counted as income? Here is how a discussion might go between NASI and CRFB representatives. (Any misrepresentations of views are mine alone).

NASI: "Of course the interest should count as income. The interest grows the trust funds, and the trust funds represent a legal claim by the trust funds that will be backed by the full faith and credit of the U.S. government."

CRFB: "Yes, but while these bonds – and their interest – represent an asset to Social Security, they are a liability to the U.S. Treasury. And because the Treasury spent that money rather than saving it, it is crazy to think that we should count this as income. The interest payments are just an accounting fiction, not a real flow of money into the government as a whole."

NASI: "If the Treasury had not issued this debt to Social Security, they would have had to increase public borrowing. So the Trust Fund balance represents money that the U.S. did not have to borrow – and that is a form of saving."

CRFB: "But for decades, Congress used the Social Security surpluses to hide the deficits in the rest of the government. As a result, Congress spent more money over the past few decades than they would have if they had not been able to hide the true cost of their profligacy behind a unified budget framework."

NASI: "There is no way to know for sure that the Social Security surpluses led to increased spending by Congress."

CRFB: "Ah, but there is – at least two academic studies (here and here) have shown that this is exactly what happened."

NASI: "Academic studies aside, there is no question that we should count this interest. And if we do count it, it is clear that Social Security is running a surplus. It is also clear that the program can pay 100% of promised benefits at least until 2033."

CRFB: "We care about the government budget as a whole – not just the narrow question of the Trust Funds. From that perspective, what we know is that the amount of money we are collecting in payroll taxes today is no longer enough to cover the payments to beneficiaries. The days of cash flow surpluses are gone. And because interest on the trust fund is just one arm of government (Treasury) making a paper transfer to another arm of government (the Trust Funds), this does not represent real income to the government as a whole. As such, the program is in dire straits, and needs to be fixed now."

Of course, regardless of your view, the conclusion should be that Social Security needs to be reformed soon. As the Trustees said:

Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.

The full piece by Brown can be found here