Legislative Update: July 2011

Legislative Update: July 2011

The Senior Citizens League (TSCL) often receives comments and questions from our members and supporters about Social Security’s role in the debt and deficit.

By Mike Watson, TSCL Legislative Assistant

The Senior Citizens League (TSCL) often receives comments and questions from our members and supporters about Social Security’s role in the debt and deficit.  In addition, recently, many policymakers have debated whether or not Social Security adds to the deficit and debt.  The answer is often obscured in political rhetoric, but the true answer is “yes and no.”

Much of how this question is answered depends on how one measures federal government debt.  In recent months, there have been statements such as “Social Security does not add one dime to the deficit” and “the trust funds are full of ‘worthless IOUs.’”  Over the past 25 years or so, Social Security collected more in taxes than was needed to pay benefits.  The surplus taxes were used to purchase special government securities which were then placed in the Social Security trust funds.  These assets, or IOUs, have gained interest over the years and are currently valued at $2.6 trillion dollars.

Often confusing are two measures of debt that are used by the government; “gross debt” and “debt held by the public.”  Gross debt includes measures including the money held in government trust funds, such as the Social Security trust funds, the Medicare trust funds and others, whereas the debt held by the public excludes the trust funds.

Gross debt also provides another important perspective.  In their work analyzing 800 years of fiscal crises, economists Carmen Reinhardt and Kenneth Rogoff found that when gross debt reaches 90% of the total economy (also referred to as the gross domestic product) economic growth is slowed.  For perspective, the United States currently has gross debt levels exceeding 90% of the total economy.

A 1990 law also states that Social Security shall be excluded from the government’s budget.  However, these issues are complicated.  For example, while Social Security cannot be counted in the federal budget under the law (in the budgetary sense) in measuring gross debt, the Social Security trust fund assets are measured as liabilities, thus adding to the gross debt.  In addition, when Social Security does not collect enough in taxes to pay benefits, and has to draw down the assets and interest held in the trust funds—as was the case in 2010—Social Security is adding to the debt held by the public.

Here’s the reason: while the assets held in the trust funds are backed by the “full faith and credit of the United States government,” they will require real money to redeem.  As the trust fund assets (first the interest and then the actual bonds) are spent down over the coming decades Congress will have to come up with money to redeem the special bonds in the trust funds.  The problem with this is where does the money come from?  Will taxes be raised?  Will spending be reduced?  Or, will more money be borrowed?

This is a question that many have asked over the years, but will now need to be answered.  Social Security’s trustees now project that the program will spend more than it collects in taxes going forward.  As this continues, the public may finally receive an answer to this question.  While TSCL believes that structural reform of Social Security will be needed to ensure Social Security’s long-term solvency, any changes should be bipartisan, well thought out, kept as small as possible, and phased in over the longest possible period of time in order not to harshly cut benefits.  In addition, acting sooner, rather than later, will allow long phase-in times for the changes to take effect.