Policy

This is a guest post by GW political scientist Robert Stoker. His previous guest posts for us are here, here, and here. Bob elaborates on his post below over at HuffPo.

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The Social Security program currently has a cash deficit. That is, the payroll tax that finances the federal government’s largest social program is not generating sufficient revenue to pay current benefits. As a result, the federal government is borrowing money to pay Social Security benefits.

On its face this suggests that the Social Security program is contributing to the nation’s debt. However, the distinctive features of Social Security finance suggest otherwise.

The Congressional Budget Office explains that our nation has two types of debts; those owed to the public and those the government owes itself. Debt to the public is owed to investors who have purchased Treasury securities. Debts the government owes itself are IOUs held by various government trust funds that have had surplus revenues in the past. The Social Security program ran a surplus from 1984 through 2009 (taking in more payroll tax revenue than was paid out in benefits). Of the estimated $16.3 trillion of accumulated federal debt through the end of 2012, $11.5 trillion was public debt and $4.8 trillion was debt held by various government trusts. The Social Security Trust Fund holds “assets” valued at $2.7 trillion.

Of course, the idea of a trust fund “asset” is controversial, since this is money the government owes itself. Trust funds are not assets to the federal government because the assets of any given fund are offset by liabilities owed by the Treasury Department; their net value to the federal government is zero. However, the Social Security Trust Fund is an asset for the Social Security Administration. That is, it represents a legitimate claim on the treasury backed by the full faith and credit of the U.S. government. Beyond this, if you believe that the nation’s debt is $16.3 trillion and counting, it is inconsistent to deny that trust fund balances (which compose about 30% of the debt) are real.

When the Social Security program has a cash deficit, the Social Security Trustees request repayment for some of the Treasury securities they purchased when the program was in surplus (when payroll tax revenues were greater than the cost of benefits). Since the government is currently in deficit, the Treasury Department must borrow money to finance these payments. However, the new borrowing does not increase total debt because this transaction is more akin to refinancing existing debt than accumulating new debt.

If you owe a $5,000 credit card bill and you take a home equity loan to pay off the credit card, your total debt has not changed; you have refinanced the debt, transferring it from one financial instrument (and one creditor) to another. Much the same can be said about repaying the OASDI Trust Fund. The fund’s assets are composed of debts already accounted for as part of the nation’s total debt. When the Treasury borrows to pay current Social Security benefits, the debt owed to the Social Security Trust Fund is repaid, refinanced, and transferred to whoever purchases Treasury securities.

Of course, the cost of refinancing the debt is a key concern. However, the only scenario in which repaying the Social Security Trust Fund can increase the nation’s debt is if interest rates are higher now than they were when the original debt was incurred. Given current market conditions (nominal interest rates are presently quite low, the rate on 10 year Treasury Bonds is around 2%), the more plausible claim is that refinancing the Social Security Trust Fund’s debt has reduced the nation’s debt slightly by reducing interest costs.

The current cash deficit in the Social Security program is not contributing to the nation’s debt. This will remain true so long as the Social Security Trust fund holds Treasury Securities that are already counted as part of the debt (current forecasts suggest this will be so for approximately twenty more years) and interest rates remain low.