Posts Tagged With: Trust law

Paying Social Security Retirement Will Not add To The Deficit

How does government borrowing to finance cash shortfalls in the Social Security program influence the deficit and debt? The line of argument used consistently by fact checkers is that the Old Age, Survivors, and Disability Insurance program (OASDI, popularly known as Social Security) is currently taking in less in revenue (from the FICA tax that finances the program) than it is paying out in benefits. This deficit must be financed by borrowing. For the fact checkers, this claim is dispositive: Since the federal government is borrowing money to pay current Social Security benefits, the program must be contributing to annual deficits and accumulated debt.Here is what the fact checkers have overlooked.

The Congressional Budget Office explains that our nation has two types of debts; those owed to the public and those the government owes itself. Debt to the public is owed to investors who have purchased Treasury securities. Debts the government owes itself are IOUs held by various government trust funds that have had surplus revenues in the past. Of the estimated $16.3 trillion debt the federal government had accumulated by the end of 2012, $11.5 trillion was held by the public and $4.8 trillion was held by various government trusts. The largest trust, the OASDI Trust Fund, had estimated “assets” of $2.7 trillion.

Of course, the idea of a trust fund “asset” is controversial. After all, this is money the government owes itself. I think of it this way. Trust funds are not assets to the federal government because the assets in any given fund are exactly offset by liabilities owed by the Treasury Department; their net value to the federal government is zero. However, the OASDI Trust Fund (for example) is an asset for the Social Security Administration. That is, it represents a legitimate claim on the treasury backed by the full faith and credit of the U.S. government.

When the Social Security program has a cash deficit (as it does currently), the Social Security Trustees request repayment for some of the Treasury securities (the IOUs) they purchased in the past. As the fact checkers have correctly observed, the Treasury Department must borrow money to finance these payments. However, the new borrowing does not increase total debt because this transaction is more akin to refinancing existing debt than accumulating new debt.

Suppose you owe a $5,000 credit card bill and you take a home equity loan to pay off the credit card debt. You have not changed your total debt; you have refinanced the debt, transferring it from one financial instrument (and one creditor) to another. Much the same can be said about repaying the OASDI Trust Fund. The fund’s assets are composed of debts already accounted for as part of the nation’s total debt. When the Treasury Department borrows money to pay current Social Security benefits, the debt owed to the Social Security Administration is repaid, refinanced, and transferred to whoever purchases Treasury securities.

Of course, the cost of refinancing the debt is a key concern. However, the only scenario in which repaying the OASDI Trust Fund can increase the nation’s debt is if interest rates are higher now than they were when the original debt was incurred. Interest rates are presently quite low (the rate on 10-year Treasury Bonds is around 2 percent). Given current market conditions, the more plausible argument is that refinancing OASDI Trust Fund debt has reduced the nation’s debt slightly by reducing interest costs.

Although current and future cash deficits in the Social Security program do contribute to the annual federal budget deficit, they do not contribute to the nation’s debt. The new deficit spending is offset by reductions in old debts. This will remain true so long as the OASDI Trust Fund has “assets” that are counted as part of the nation’s accumulated debt and interest rates on Treasury securities remain low.

(By Robert Stoker, Associate professor, George Washington University)

Let’s talk once again about Social Security solvency, shall we? The way the Social Security works is that current workers make contributions, from their paychecks, to current retirees. (This arrangement is often forgotten about — too many people have been led to believe that they are “paying in” to their own Social Security savings, and they aren’t — those contributions will be made by a younger generation.) The solvency of Social Security is at risk if the following two things happen: 1) the number of recipients overwhelmingly outnumber the number of contributors and 2) American lawmakers forget how to do math.

What we popularly refer to as the “Social Security solvency crisis” refers to a large population of Americans (the “Baby Boom Generation;) entering their retirement years at a time when the number of contributors is less than ideal. Hopefully, however, someone at some point is going to remember how to solve a simple arithmetic problem, raise or remove the income caps on contributions (right now, incomes that exceed $110,100 are not subject to contributions beyond that amount), and then we will never have to worry about Social Security solvency again.

And let’s not forget that when Ronald Reagan and Tip O’Neill reformed Social Security — as we’re constantly reminded they did — it’s more than possible they were aware of the Baby Boom generation. If they were blessed with eyesight, they could look around and see them for themselves. They were older than 30 by then, after all. In fact, one of them, Nancy Altman, actually worked on the commission that reformed Social Security. So we asked Altman, a baby boomer, if she was aware in the 80s that she existed. She said that she was — and that other people were aware, too. So they took the baby boom into consideration. That’s why it’s solvent late into the 2030s.

Categories: Social Security Benefits | Tags: , , , , , , , , | 1 Comment

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