CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs CEPR Blog FactCheck Gets It Wrong on Social Security and the Deficit

FactCheck Gets It Wrong on Social Security and the Deficit

Print
Written by Dean Baker   
Saturday, 26 February 2011 21:12

FactCheck.org, a project of the Annenburg Public Policy Center, wrongly attacked a number of prominent Democrats for correctly pointing out that Social Security does not contribute to the deficit. The people attacked included New York Senator Charles Schumer, Senate Majority Whip Richard Durbin, and President Obama’s Budget Director Jacob Lew.

This point should be pretty straightforward. Under the law, Social Security is financed by a designated tax, the 12.4 percent payroll that workers pay on their first $107,000 of income each year. The money raised through this tax is used to pay benefits. Any surplus is used to buy U.S. government bonds. All funding for the program comes either from this tax or from the bonds held by the program’s trust fund. (The Social Security system is also is credited with a portion of the income tax paid on Social Security benefits.)

Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund.

The one exception to this rule is the roughly $120 billion being credited to the Trust Fund in 2011 to offset the lost payroll tax revenue due to the 2 percentage point reduction in the payroll tax. Apart from this special 1-year exception approved by Congress at the end of last year, Social Security is literally prohibited under the law from adding to the deficit.

FactCheck argues that Social Security will contribute to the deficit because it will be drawing on the interest on the bonds that it holds beginning in 2016 and later will begin selling these bonds. This would be like claiming that Peter Peterson, the Wall Street investment banker and vociferous proponent of cutting Social Security, is contributing to the deficit if he sells a billion dollars in government bonds to finance his anti-Social Security agenda.

In both cases the government would need someone to buy up the bonds to replace the bonds that were already sold. However, this is just a redistribution of the debt. The decision by the Social Security trust fund to sell its bonds no more increases the debt of the U.S. government than the decision by Peter Peterson to sell his bonds.

FactCheck’s confusion probably stems from its reliance on figures for the “unified budget.” This budget adds in the annual surplus or deficit from Social Security.

However, every single budget document put out by the government also includes the “on-budget” budget that treats Social Security as the distinct program it is under the law. This budget would show that Social Security has no effect on the deficit (except due to the payroll tax cut for 2011), since it is a self-financed program.

Obviously Senators Schumer and Durbin and Mr. Lew were referring to the on-budget budget. It is hard to believe that Factcheck did not understand this basic fact about the U.S. budget. They were right and FactCheck is wrong.

Social Security does not contribute to the budget deficit. That is the law.

Comments (7)Add Comment
Factcheck skirts the Law
written by Randy, February 27, 2011 2:59
Factcheck.org wrote:
"Social Security benefits are entirely self-financing." That’s not true, except in a very narrow, legalistic sense ...

-----

What other sense is when talking about legislation except the law?
Social Security
written by Bob, February 27, 2011 8:16
It's not that difficult. When the Federal Government has needs greater than resources it issues debt. When more money comes into Social Security than is needed for benefits, it buys US Treasury debt. According to the CBO, Social Security in 2010 and 2011 ran/will run a surplus around $100 billion and holds an accumulated (about) $2.6 trillion in Treasuries. Therefore, Social Security has loaned money to the rest of the government to help float our budget deficit.

What's so difficult about that?
Ambiguity
written by Arne, February 27, 2011 11:59
An unambiguous answer would require unambiguous knowledge of whether the amount of interest being paid on treasury loans would be the same whether or not SS existed. The government would just need to borrow the money elsewhere if it continued the same other programs with the same revenues. If that is the case then SS has no affect on the deficit. If the lack of the SS surplus would have changed the other programs, then SS does contribute.


Factcheck's analysis is wrong by an order of magnitude. Not entirely wrong, but more wrong than right.
..., Low-rated comment [Show]
...
written by kharris, February 28, 2011 10:20
Bruce has not carried the accounting through from beginning to end. If one does that, Baker's claim is completely credible. In the end, it is spending more than one takes in that produces a deficit. The source of the funding is not irrelevant in a lot of ways, but when it comes to the issue of the deficit, it is.

If Treasury had not borrowed from Social Security when SS was running a surplus, then Treasury would have had to borrow from somebody else. That's because the general fund was in deficit - we spent more than we brought in. That "somebody else" would have needed funds to lend, and the SS Trust would have had funds to led. Would the 3rd party have been "contributing to the deficit" by demanding payment from Treasury? It would certainly be an odd way to describe the situation, but go ahead, those of you who want to. The Social Security Trust would be repaid by the 3rd party.

So, unless we decide that abrogating contracts is an OK thing to do, this talk about "contributing to the deficit" is mistaken, because it pretends that the flow of funds between some institutions is different than the flow from others. Treasury borrowed the money because it was in deficit. Treasury needs to pay the money back to keep faith.
...
written by DollyMadison, February 28, 2011 1:20
The deficit spending happened when the SS Trust Fund loaned the money to the US General Fund. If the SSTF says "pay us back what you owe us", the General Fund can cut spending or borrow an equivalent amount from another lender. The deficit doesn't increase one bit! The group that holds the IOU for an amount of borrowing simply changes! The moment the government took the loan from Social Security, the debt obligation began, not when they asked for it back.
good, Low-rated comment [Show]

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613
budget economy education employment Haiti health care housing inequality jobs labor labor market minimum wage paid family leave poverty recession retirement Social Security taxes unemployment unions wages Wall Street women workers working class

+ All tags