We need to fix the program, but that won’t lower federal deficits or the national debt
By Herbert Rothschild
To judge by post-speech commentary, the highlight of President Biden’s State of the Union address was the way he scored a point over the Republicans on Social Security (SS) and Medicare. From a partisan perspective it may have been a triumph, but how much did it help those programs?
The programs got into the speech in connection with Biden’s appeal to cut the deficit by making the tax system more progressive. Then he said, “Instead of making the wealthy pay their fair share, some Republicans want Medicare and Social Security to sunset every five years. That means if Congress doesn’t vote to keep them, those programs will go away.” At that point, those in the MAGA bleachers booed, and Marjorie Taylor Greene shouted out that he was a “liar.” Deviating from his text, Biden seized the occasion to ask everyone who supported SS and Medicare to stand up. Almost all the Republicans stood, and then Biden concluded, “So, folks, as we all apparently agree, Social Security and Medicare is off the books now, right? . . . We got unanimity.”
What Biden meant to say is “off the table,” but had he really wanted to champion the programs and get Congress to address the deficit and debt responsibly, he would have intended to say what he said — that they would not be on the books, not in the annual budget he submits to Congress or the budget that Congress passes.
SS and Medicare are both trust funds. They are the largest of the dozens of trust funds the U.S. Treasury administers. However, because the two programs have different legislative histories and currently face different challenges, in this column I’ll only discuss SS.
Since its creation in 1935, SS sometimes has been off the books, sometimes on. The full history can be read on the Social Security Administration website, where the terms used are “off budget” and “on budget.” Here is the historical summary it provides: SS was off-budget from 1935-1968; on-budget from 1969-1985; off-budget from 1986-1990 for all purposes except computing the deficit; off-budget for all purposes since 1990.
Note that, by law, SS is now “off budget,” but it’s not being thought of that way. Public officials and newscasters are still talking as if it’s possible to cut the budget deficit by cutting SS. Biden may have thought he was protecting the program, but he reinforced the impression that it could serve that purpose. (More on this below.)
What’s a trust fund? It’s a pot of money that has a legal identity. Money flows into and out of it according to the terms of the trust agreement. Originally, SS was simply an account on the federal books. Money raised by the payroll tax (FICA) began flowing in January 1940, and monthly benefits began flowing out January 1942. But the 1935 act was amended in 1939 to establish the “Federal Old-Age and Survivors Insurance Trust Fund.”
None of the SS trust fund income is appropriated by Congress. Its main source of income is the monthly contributions of workers and their employers. In that respect, it’s like a private pension fund, except that it’s administered by the Secretary of the Treasury according to rules set by Congress. Also like a pension fund, its other source of income is the investment return on the money held in the fund at any given time. The health of the fund is a combination of the difference between contributions in and benefits out plus its investment income.
The investment rules governing the fund were established in the 1935 act and are essentially the same today. “It shall be the duty of the Secretary of the Treasury to invest such portion of the amounts credited to the Account (later, the trust fund]) as is not, in his judgment, required to meet current withdrawals. Such investment may be made only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.” What this has meant in practice is that SS doesn’t add to the federal debt but funds it.
There are two portions of the national debt, which stood at $31.38 trillion this January. One portion is Public — $24.5 trillion; the other is Intragovernmental — $6.875 trillion. The latter portion consists largely of non-tradable Treasury bonds held by the trust funds; SS holds the most.
Until 2010, the payroll taxes into SS vs. benefits out of SS was a positive net. So, from 1969 to 1990 SS surplus income disguised the actual size of the budget deficit. In 2010, however, the net turned negative, so to cover benefits the Treasury began selling off the bonds SS held. This money belonged to the trust fund, but to pay it, the Treasury had to come up with other monies, thus increasing the Public portion of the federal debt relative to the Intragovernmental portion. Only in this special sense does SS contribute to the federal debt problem. Until the trust fund holds no more Treasury bonds to redeem — 12 years is the estimate — it will still be funding the debt, not increasing it.
The conversation we need to have is about returning to a positive number the difference between SS taxes in and SS benefits out. That conversation is muddied by merging it with concern over federal budget deficits and the national debt. The way to reduce those is the one Biden identified: getting the wealthiest individuals and the corporations to pay their fair share. The changes to the tax code that began with the Reagan administration and were exacerbated by the George W. Bush and Donald Trump administrations caused those problems.
Responsible people have been talking about ways to return SS to actuarial solvency. I think the wrong way is to cut benefits either by reducing monthly payments or upping the age for retirement benefits. Simply because there are now fewer workers paying into the fund in relation to the number of its beneficiaries doesn’t change the fact that retirees paid into the fund all during their work lives.
A fairer solution is to raise the maximum amount of income on which the SS tax is paid. Currently, FICA is only levied on income up to $160,200. As income has skewed to the top, the percentage of total U.S. income subject to the SS tax has fallen. In 1982, it was 90%; in 2017 it was 84%, and that trend has continued these last five years as income inequality accelerated. An even fairer solution would be to tax unearned income (e.g., dividends and capital gains), not just earned income, up to the cap. That would make it possible to lower the 6.2% tax and still guarantee solvency into the foreseeable future.
Herbert Rothschild is an unpaid Ashland.news board member. Opinions expressed in columns represent the author’s views and may or may not reflect those of Ashland.news. Email Rothschild at firstname.lastname@example.org.