There is a lot of interest in social security these days especially around the question of whether or not it's broke. President Obama's deficit reduction commission has targeted social security as a program that needs to be cut in order to reduce the deficit because it's running out of money. On the other hand others have pointed out that the Social Security Trust Fund is solvent way into the future. Who's right? It depends on how you look at it.
The Social Security Trust Fund holds the balance of the funds paid into social security via FICA taxes. Up until recently more money has been coming into the government from social security taxes than has been paid out to social security recipients in any given year. The surplus is transferred to the government's general fund and is used to reduce the amount of the deficit for that year. In other words the government would have to borrow even more money from selling Treasury bonds to the general public if it didn't have the surplus social security money going into the general fund. However, that money is not lost to future social security recipients because the Social Security Trust Fund is credited with that surplus in the form of special Treasury bonds. In theory these bonds can be redeemed at such time as they are needed to pay social security recipients. These bonds are not sold on the open market, and interest is actually paid by the government into the Trust Fund according to the money it has borrowed to offset the deficit. Currently, the Social Security Trust Fund has some $2.5 trillion dollars in assets in the form of these intergovernmental bonds. These bonds represent the full faith and credit of the US government just the same as the bonds that are sold to the general public. Another important fact is that these intergovernmental bonds are not considered to be part of the deficit.
The problem arises that each year the social security surplus is diminishing so that even though more money is coming in in social security taxes than is going out in social security payments, that situation will change in the near future, if it hasn't already, and less money will be coming in than will be going out henceforward. However, there is enough money in the Trust Fund to keep paying out benefits for 29 years, according to Senator Bernie Sanders, so the Social Security Trust Fund is not bankrupt and no drastic reform measures are necessary. What will happen is that the assets in the Social Security Trust Fund will just be reduced as benefits are paid out. The amount that social security is in cash flow deficit each year will simply be made up by selling off the accumulated surplus of bonds. But what happens when those special Treasury bonds are sold by the Trust Fund? The Federal government will have to raise the money to redeem the intergovernmental bonds by selling Treasury bonds on the open market thus adding to the deficit. So while the surplus in the Social Security Trust Fund has been used to reduce the deficit at least since the 1980s, now the Social Security Trust Fund, by cashing in those bonds, will actually increase the deficit. This is what the deficit commission is really worried about. If the government is to honor its committment to future social security recipients, it must increase the deficit by selling Treasury bonds on the open market or raise taxes in order to do so.
So far social security has been a cash cow for the Federal government's general fund reducing the deficit year after year. In the near future social security will be a drag on the general fund increasing the deficit year after year. What some want to do is to essentially reneg on the government's commitments to social security retirees either by lowering monthly payments, eliminating COLAs or raising the retirement age. It could do all these things because there is no hard and fast rule that relates the amount paid in by each social security recipient and the amouint they are owed by the government. For all practical purposes the social security program is an old age welfare program although the government resists putting it in those terms preferring instead that it be seen as a pension program which is paid out according to the amount paid in by individual recipients.
Currently, social security taxes are only taken on the first $106,000. of annual income. Income above that is not taxed for social security purposes at all. This is referred to as the social security cap. One way of bringing more money into the Trust Fund is to raise the cap. Another way to reduce the gap is to means test social security payouts. Millionaires and billionaires don't need another $1000. or so from social security. But then this would be admitting that social security is a welfare program with money being redistributed from rich to poor. The already nebulous link between what's paid in and what's received would become even more nebulolus. So on one level the argument is is social security a welfare program or not? Arguably, it is because 30% of all payments go not to pensioners or retirees but to disabled people. If the retirement age is raised, many people not yet eligible for social security because of their age could qualify as disabled.
Conservatives have been trying to kill social security ever since it was enacted by FDR in the 1930s. They are philosophically predisposed against it. That's why they are always trying to privatize it. Deficit hawks are worried that, if money has to be taken out of the general fund to repay those special Treasury bonds, their taxes will go up or the deficit will increase. So there is something to worry about as the social security income to the government becomes less than the payouts in benefits or as social security goes into cash flow deficit. Even though the bonds held in the social security trust fund have the full faith and credit of the US government and can fund current social security payments into the 2040s, the Federal deficit will increase in order to pay off those bonds. That's probably why the deficit commission was so obsessed with social security. The only way around this is to keep social security in cash flow surplus, and the simplest way to do this is to raise the cap.
