Why Social Security Cuts Should Not be Part of the Deficit Discussion

Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits.

Peter Fisher
Peter Fisher

The short answer: Because Social Security is not the cause of deficits in the first place.

So then why do so many commissions and politicians insist on including Social Security “reforms” on their lists of things to do to reduce the federal deficit? Because it is a politically convenient way to force cuts in Social Security benefits onto the public agenda.

In actual fact, Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits. Social Security has been financing part of the federal deficit by investing the surplus in federal bonds.

Now let me tell you a story. One day a guy named George lent a friend $1,000 for a year. He didn’t need the money now, but he would in a year’s time to pay tuition when his daughter started college. But when the time came for his friend to pay George back, the friend said, “Geez, that’s a problem; if I have to actually pay you back the money you lent me I’ll be short, and it will be your fault, for demanding that I repay the loan. I think the fair thing is for you to cut back by not sending your daughter to college so you can afford to roll over my loan indefinitely.”

Would anyone take such an argument seriously? Of course not. Yet many people seem to take seriously the argument that it will be Social Security’s fault if at some point Social Security needs to be repaid some of the money it lent the federal government. And that the solution is to lower the standard of living of future retirees so Social Security can continue to buy federal bonds.

In a few years Social Security will be paying out more in benefits than it is collecting from payroll taxes. Then it will have to sell some of those bonds held by the Trust Fund to pay full benefits. This is precisely what the Trust Fund was set up to do: to be drawn down to ease the burden of paying baby boomer retirement benefits. But Social Security will still not be contributing to the deficit; it will simply no longer be helping to finance it.

How large the federal deficit will be will depend largely on how well we contain rising health care costs and other expenses, and whether we continue to renew tax cuts to the wealthy. Who will finance that deficit is a reasonable question. The important point is that when the Social Security Trust Fund is no longer purchasing federal bonds, and is cashing in some of the bonds it holds, the size of the national debt will not be one dollar larger because of that. The only thing that changes is who holds the debt. The Trust Fund will hold less, private investors and foreign governments will hold more.

As for the benefit-cutting deficit hounds, I am thinking about asking them if I can borrow $1,000. Just to conduct a little experiment in logical consistency.

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

1 thought on “Why Social Security Cuts Should Not be Part of the Deficit Discussion”

  1. Also need to get out and stay out of trillion-dollar wars; Dean Baker asserts that if USA spent same percent of GDP on health care as Europeans we’d have a budget surplus.

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