The chance of problems affecting the timely funding of Social Security benefits appears to be growing this year. The Republican majority in the House pushed through a new set of rules which would make it harder to raise the federal debt limit without corresponding spending cuts. That includes rules that would complicate the consideration of legislation that would increase mandatory spending without cuts. Mandatory spending provides the funding for Social Security, Medicare, and other safety net programs. A supermajority, or 290 votes out of 435, would be required in the House of Representatives to raise taxes. This increases the possibility of a confrontation over raising the debt limit and demands to cut Social Security benefits. It would also increase the chance that payment of Social Security benefits may be delayed or raise the risk that benefits might not be paid in full, should law makers stalemate over a budget agreement.
Prior to the midterm elections, the Republican Study Committee released a budget outline that included blueprints for reforming Social Security and Medicare. The Social Security options discussed include allowing employers and employees to divert payroll tax revenues, which are currently needed to pay the benefits of today’s retirees, out of Social Security and into a system of private accounts. This option was highly contentious when a similar proposal was considered two decades ago under then-President George W. Bush.
This approach to the debt limit is still controversial for the same reasons, including the fact that the payroll taxes collected today pay the benefits of today’s retirees. Under current law, 94% percent of the cash funding for Social Security benefits comes from payroll taxes and the income taxes on Social Security benefits. In addition, there is one further source of funding from the federal general budget — “interest” for money owed to the Social Security Trust Fund.
As employers send payroll taxes to the U.S. Treasury, the Treasury issues special non-marketable bonds (I.O.U.s) to the Social Security Trust Fund, and by law, pays the current interest rate to the Trust Fund. In 2023, the Trust Funds are estimated to receive $59.4 billion in funds on these I.O.U.s.
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Sources: “Blueprint to Save America, Fiscal Year 2023 Budget” Republican Study Committee, U.S. House of Representatives, 2022.