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Home Publications Blogs Beat the Press Lesson for Reporters: Social Security Does NOT Add to the Budget Deficit

Lesson for Reporters: Social Security Does NOT Add to the Budget Deficit

Monday, 13 August 2012 04:41

Associated Press decided to use a "Fact Check" to wrongly tell readers that Social Security adds to the budget deficit. The piece acts as though Social Security's impact on the budget is somewhat mysterious, with supporters of the program, like Representative Xavier Becerra and Senator Bernie Sanders, being confused into thinking that the program doesn't add to the deficit, even though it really does.

There actually is not much mystery here to those familiar with government budget documents. There are two different measures of the deficit. There is the unified budget deficit, which adds in the payroll taxes collected for Social Security, just like any other source of revenue, and treats the benefits paid out by Social Security just like any other expenditure. In this measure, Social Security will add to the deficit in any year in which its benefit payments exceed its tax collections. (This is the case, even if the fund still has a surplus due to the interest it collects on the government bonds it holds, although it means that Social Security is contributing to the deficit because it is spending some of the interest it has earned.)

However there is also the on-budget deficit, which reflects the fact that Social Security is not supposed to be counted as part of the budget. This mysterious budget can be found in just about every single budget document the government publishes (e.g. here, Summary Table 1), saving arithmetically challenged reporters the need to subtract out Social Security taxes and spending from the unified budget. (The on-budget deficit also corresponds to the debt subject to the legal limit, which has played such a prominent role recently.)

Under the law, Social Security cannot possibly contribute to the on-budget deficit. It can only spend money that has been collected from the designated payroll tax or from the investment of past surpluses. (The money from general revenue to make up for the temporary payroll tax cut the last two years is an exception to this rule.) If benefit payments exceed current revenue and the money available in the trust fund, as the Congressional Budget Office projects will happen in 2038, then Social Security would not be able to pay full scheduled benefits. It could not force the government to increase its deficit.

It is incredible that a "fact check" failed to note the on-budget budget. This is obviously what Becerra and Sanders were referring to when they said that Social Security does not contribute to the deficit. Reporters who write on Social Security should be familiar with it.

This fact check also included some gratuitous editorializing on the deficit. It told readers:

"The issue [whether Social Security contributes to the deficit] is important because the federal government's annual deficit already exceeds $1 trillion, making any more borrowing tough to swallow."

It is not clear why the article considers more borrowing difficult to swallow. The financial markets have a very different view since investors are willing to lend the U.S. government money at extremely low interest rates. The reason why the government is running large deficits is because private sector spending plunged following the collapse of the housing bubble. Those who want to see the economy grow more rapidly are likely to prefer more government spending and larger deficits, since there is no other way to make up the shortfall in demand. Associated Press should leave editorializing like this in its opinion pieces.

Comments (18)Add Comment
Free Money
written by Robert Salzberg, August 13, 2012 6:23
The U.S. government is currently selling Treasury notes for up to 20 years at interest rates so low that they don't keep up with projected inflation. In real terms, we are being paid to borrow money.

How can we afford to not borrow more money at these rates with so many unemployed workers and so much work that needs to be done?
Social Security, Deficit, and "Full Faith and Credit"
written by sherparick, August 13, 2012 6:54
Another thing about this debate that I always find revealing, from the class perspective, is that rentiers like Judd Gregg and Pete Petersen, who would be aghast if the U.S. "hair cut" its bonds held in their investment accounts, or even by foreigners like the Bank of China or Japan, but are more than willing to "hair cut" the bonds held in the social security trust fund if means lower taxes for themselves. Notice that in all this social security "reform" there is no talk about permanently reducing the FICA tax on employees. So it is about stealing money from those who work and giving money to capital.

It is also about establishing a neo-feudalism in the U.S.
AP Includes SS In the Deficit to Call It Welfare Instead of Insurance
written by Last Mover, August 13, 2012 8:05
In this measure [unified budget], Social Security will add to the deficit in any year in which its benefit payments exceed its tax collections. (This is the case, even if the fund still has a surplus due to the interest it collects on the government bonds it holds.)

This is like saying as soon as a car pulls away from the gas station it uses more gas than it takes in and adds to the "gas deficit" despite the full tank of gas just acquired. If AP was consistent it would be reporting dire warnings that this cannot continue and all traffic will eventually come to a full stop.

For the on-budget deficit, AP should be delighted at such a tidy zero sum topic on which to report for SS completely severed from the general budget. Here, in the gasoline analogy, all AP need do is follow the SS cars around and fact check miles driven (benefits) compared to gas consumed (input cost).

How much gasoline consumed compared to how much is in the tank is only relevant to how many effective tank fulls are stored in the SS investment inventory and the rate of draw down, none of which affects the on-budget deficit or surplus.

This is more than just another careless mistake by willfully ignorant reporters. There's a hidden ideology behind it designed to characterize SS as welfare funded by all taxpayers rather than the self funded insurance it is.
written by Downpuppy, August 13, 2012 8:09
You do realize that this is the same Stephen Ohlemacher series you've hit twice already, right?

Yes, the same guy who hid the inflation + 2% adjustment is now making a big deal of interest payments on the trust fund.
written by JSeydl, August 13, 2012 8:22
The federal government's annual deficit already exceeds $1 trillion, making any more borrowing tough to swallow.

This is such a bizarre statement. The real yield on Treasuries with maturities up to nearly 20 years is negative. Out to 30 years, real yields aren't over 0.5%. More borrowing is incredibly easy right now. In fact, I don't think it has ever been easier in modern history.
How APt
written by David, August 13, 2012 8:55
Ohlemacher is just one more sign of the disappearance of journalistic standards at the AP (in particular) and the media (in general). Journalism got coopted by political advertizing.
AP joins Fox in eliminating journalism
written by RBShea, August 13, 2012 11:11
Why a Steve Ohlemacher is allowed to publish such patently inaccurate and, in fact, misleading columns is one more sign that either AP has abandoned any editorial fact checking standards or has simply joined Fox "News" in eliminating any attempt at actual journalism. Covering their butts with "opinion" column lables nonetheless demands something of the editors of alleged journalism outlets.
written by fuller schmidt, August 13, 2012 12:18
The misstatement of fact is considered a symptom of delusions of grandeur. And the delusional always have a fetish aspect to their lives. So at best we are now having our lives affected by a cohort of Michael Scotts of Dunder-Mifflin Paper.
written by AlanInAZ, August 13, 2012 1:32
Suppose SS was an insurance company receiving premiums (ss taxes), holding interest paying assets ( US treasury bonds) and paying settlements (SS benefits). Suppose settlement payments exceeded premiums, the difference coming from interest on the US treasury bonds. Would we then claim that the insurance company cash flow is raising the US deficit? I don't think so. To me this is easier to understand than citing two government budgets that seem contrived to non accountants or is my analogy inadequate.
Recent book also repeats the lie
written by George Fleming, August 13, 2012 3:31
Simon Johnson and James Kwak wrote the book "White House Burning" (2012). In the text, they claim that Social Security contributes to the deficit. To support this lie, they wrote footnote 82 on page 291:

"Social Security currently contributes to the federal deficit even though the program is still running an annual surplus..." and then try to justify this nonsense with an "opinion".

Just a couple more pundits jumping on the Pete Peterson bandwagon. May it turn into a tumbril, figuratively speaking.
Yeah but
written by Floccina, August 13, 2012 3:52
Yeah but if FICA is a tax, then SS is a welfare program. If FICA is not a tax but a contribution to a retirement annuity then you cannot go around saying that people who do not pay income taxes still pay the payroll/FICA tax because it is not a tax but a contribution, just like what goes into a 401k.

Now I believe that we should dispense with the fraud that it is a retirement plan call it what it is an old age welfare program. Then we can pay all retirees the same monthly benefit and merge the FICA tax into the income and make tax smoothly progressive.
written by skeptonomist, August 13, 2012 4:04
The custom in the US has been to talk about deficits in terms of the unified budget - even Dean does this when he mentions the "large surpluses" of the last Clinton years. If that is the frame of reference, then during the years when payroll taxes were building up the Trust Fund, SS was *reducing* the size of deficits (that's why politicians use the unified budget - I don't know why economists would). Starting in a few years, money will flow out of the Trust Fund (as has always been planned), and in the "unified" frame of reference it is accurate to say that SS is *increasing* the size of deficits.

Of course as Dean says the budgets are not legally supposed to be unified, and it's grossly hypocritical to talk about the role of SS in increasing "unified" deficits in the future while ignoring the fact that SS reduced these deficits in the past. Those who do are effectively advocating a wealth transfer from the low-income people (boomers) who paid into the Trust Fund to the high-income people whose taxes were cut during the time the Trust Fund was built up.
Yeah, but to the "yeah, but"
written by David, August 13, 2012 4:39
Fiona, FICA stands for "Federal Insurance Contributions Act," so it's a contribution to old age povertry insurance (not welfare!!). Because workers are required to contribute if they wish to work, it's also called a tax. But FICA deductions are paid out to individuals and are not used for operating expenses of the federal government, so they are not income taxes and should not be rolled into one ball with them. I don't understand why you (Fiona) say that all retirees should have the same monthly benefits, since some contributed more than others, so they get a (slightly) larger share, and that's fair.

FICA contributions are not a tax, they're a premium.
written by ezra abrams, August 14, 2012 11:24
Dear Dr Baker
I would say that there is a logical flaw or disconnect in this piece - you don't say why the on budget deficit is preferred to the unified; one can sort of infer that this is because ss is a dedicated stream of funding, but that leaves the question as to why the unified budget is the headline number. (afaik, a trick by lbj to hide nam deficits)

perhaps it is not a logical flaw but a, if you will forgive the expression, an emotional flaw: to a layperson like me, the attempt to distinguish between on and off budget deficit smacks of fancy footwork.
If I may, y ou might try re writing this starting with the idea that ss is a dedicated stream, and that untill 1964 was not counted, and that this occcured due to lbj
one thing that always confuses me is that (afaik) the us gov't has borrowed from ss, giving ss ious (treasury bills or equivalent) and that as the baby boomers age, ss will send those ious back to treasury for cash.
I hve never understood why this doesn't add to the deficit - if ss says to treasury, here are 100 billion of ious, please give us 100 bn in cash, how is that accounted for ?

Trust fund perspective v the Budget Perspective
written by Don Levit, August 14, 2012 11:45
The trust fund perspective considers the Treasury securities and interest in the SS trust fund as good as gold.
Because we are the USA, respected by all, and the strongest country on earth, Treasury securities will be honored.
The Budget (cash) Perspective considers the impact of cashing in trust fund interest and principal where there is a cash shortfall (as has occurred since 2010). To cash in the shortfall the last 2 years, bonds were not simply liquidated, as if they were pre-funded. New general revenues had to be raised (if a budget surplus) or increased debt held by the public (if a budget deficit).
Guess which avenue we took?
From the Trust Fund Perspective, the Treasury securities are seen as an asset, and the trust is loaded.
From the broader (and more accurate, in my opinion) Budget Perspective, the trust fund is empty, for it takes either new general revenues or additional debt held by the public to redeem the principal and interest.
This is the same way we pay all pay-as-you-go expenses like Medicaid.
To indicate the ludicrousness of the Trust Fund Perspective, its adherents claim that Medicare Part D is fully funded!
Don Levit
Trust fund surplus is reducing the unified budget deficit as well
written by Dwayne from Dubuque, August 14, 2012 8:17
Trust fund interest income reduces even the unified budget deficit. The deficit is expenditures plus net interest minus taxes. Trust fund interest reduces net interest and thereby reduces the unified budget deficit.
Trust fund interest
written by Don Levit, August 15, 2012 8:14
You are correct regarding the math of the truth fund interest. This interest has no impact on the budget, immediately. The interest is paid with debt, so it increases intragovernmental debt. While it does lower the unified deficit, an immediate budget impact, it eventually raises the debt held by the public when it is redeemed to make up for any SS cash shortfall (as happened since 2010, and according to the latest trustees report, will continue being redeemed, including principal) until trust exhaustion).
Don Levit
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.