The Grain of Truth in the Treasury Report's Warning Over Social Security

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On Monday the Treasury released an issue brief that will be the first of several on Social Security's funding problems. The report explains that, using the assumptions of the Social Security Board of Trustees, the program will not be able to fully pay the benefits that are scheduled starting in 2041. Under law, benefits must at that point be reduced to a level matching revenues in the program, which would be about 25 percent below the full benefit levels scheduled.

Balance Issue Overstated

It's worth pointing out that the assumptions used to make these projections are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions were borne out, the benefits scheduled to be paid in 2041, even after the 25 percent reduction, would still be larger in real terms than those benefits paid today.

Which is not to say such a cut in scheduled benefits would be acceptable, since the program is meant to replace a reasonable portion of wages. But the claims by the administration that the program is in grave danger seem overstated. Several measures, such as increasing the payroll tax by a couple percentage points or raising the cap on wages subject to the payroll tax, could ensure that the there is enough money flowing into the program for the next 75 years.

The report tries to make the argument that we must look further than 75 years and ensure that the program is in balance over an "indefinite future" -- which is hard to swallow to say the least. The fact that the program is currently scheduled, even using pessimistic assumptions, to be in balance until 2041 probably makes it more secure than most federal programs in the minds of many Americans.

Several members of Congress have rightly argued that the report is just one of several attempts by the Administration to convince the public that Social Security cannot function without some radical overhaul, which usually involves private accounts that have nothing to do with making the program solvent.

But There Is a Problem if Social Security Surpluses Are Not Saved

But there is a problem that deserves our attention. For several decades leading up to 2041, a portion of Social Security benefits will be paid out of the Social Security trust funds, which are basically accounting mechanisms to keep track of the surplus Social Security taxes that have been paid into the program since the 1980s. If the Social Security surpluses are not immediately spent by the government but are instead used to pay down the debt, that can make it much easier for the government to pay Social Security benefits later on as the baby boomers retire in large numbers. But this has only happened during the late 1990s, during the Clinton Administration. At other times, the Social Security surpluses have been used to fund other government spending and tax cuts.

This raises an important question. As Citizens for Tax Justice explained in a 2006 report on Social Security funding options, Social Security could be brought into balance -- on paper -- by raising or eliminating the cap on wages subject to Social Security payroll taxes, by increasing the payroll taxes or by broadening the definition of income subject to Social Security taxes. But if future presidents and Congresses cannot restrain themselves from spending the surpluses, it's not clear that the program will truly be any more secure.

This issue will be addressed in the next issue brief from the Treasury on Social Security. The authors end this edition by telling us that "Many analysts believe Social Security surpluses do not result in smaller levels of publicly held debt, but instead result in some combination of higher spending or lower taxes in the non-Social Security budget." Perhaps an earlier version included the words "when a President named Reagan or Bush occupies the White House."

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