Ask The Advisor: November 2009

Ask The Advisor: November 2009

Q:  When will Congress pay back all the funds they took from Social Security and spent on their pork barrell projects?  This devastated Social Security.

A:  Repaying the $2.5 trillion that the federal government has borrowed from Social Security will not be simple, but the program is predicted to start running short of cash in 2010.  According to the Congressional Budget Office (CBO), our deep economic recession and high unemployment are severely impacting program financing..

Since 1983 the Social Security Trust Fund has received more in revenues than is required to pay benefits and, by law, Social Security revenues not needed to pay benefits are used to fund other government programs.  The Treasury borrows the excess revenues, replacing them with special non-marketable bonds at current market interest rates, and the “interest income” is credited to the Trust Funds.  Those bonds, and the interest they generate, don’t represent real cash.  They are IOUs from one part of the government to another.

When Social Security’s cash revenues become inadequate to pay benefits in full, the Social Security Trust Fund will need to redeem the Trust Fund’s special bonds (the IOUs and interest) from the Treasury.  To pay the Trust Fund, the Treasury will need to provide cash from general revenues.  But the cash can only come three ways: through some combination of borrowing, increased taxes, or cutting benefits and other spending.

According to a 2007 report from the Government Accountability Office (GAO), “such use of general revenue (rather than payroll taxes) for Social Security would represent a major shift for this important and popular program.”  The report also says “The use of general revenue was proposed both before the actual creation of Social Security and during short-term financing crises in the 1970’s and 1980s as an alternative to payroll tax increases, but Congress for the most part has rejected general revenue financing for Social Security.”

While some borrowing to pay benefits is likely to continue in the short-term, President Obama and Congress are expected to begin considering a number of proposals to change Social Security by year’s end or early next year.  The most frequently-mentioned changes would raise taxes, including taxes on your Social Security benefits and payroll taxes if you still work, as well as proposals that would cut benefits, including changes that would reduce the rate of the annual cost-of-living adjustment (COLA).

TSCL believes that it would be irresponsible for Congress to put off work to ensure Social Security’s finances.  Nevertheless, we strongly oppose changes that would slow the growth of COLAs which don’t fairly represent the costs experienced by seniors.

TSCL believes that any change to Social Security should consider the importance of maintaining the adequacy of benefits to cover Medicare and healthcare costs which are rising more quickly than overall inflation.  TSCL supports legislation that would use a seniors’ Consumer Price Index, like the Consumer Price Index for the Elderly (CPI-E), to calculate the annual increase.

Sources:  The Budget and Economic Outlook, Congressional Budget Office, August 2009.  “Greater Transparency Needed About Potential General Revenue Financing,” GAO, March 2007.