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"Social Security has not added one penny to the deficit."
-- Sen. Dick Durbin, D-Ill., Nov. 27, 2012
In 2011, we evaluated a similar statement about Social Security and gave it a relatively rare rating -- "true but false" -- which seemed to please no one. Yet as the "fiscal cliff" talks have heated up, Democrats have once again been using this talking point to shield Social Security from the chopping block.
Durbin, to his credit, in a recent speech, acknowledged that Social Security's long-term financing is an important issue that cannot be deferred. He advocates creating a commission to separately address how to ensure 75 years of solvency. So we don't mean to pick on Durbin because plenty of Democrats in recent days have made similar comments.
But we remain troubled by this talking point, especially given the recent further decline in Social Security's finances. We do not think this line is a slam-dunk falsehood, but it is certainly worth revisiting.
Social Security is a pay-as-you-go system, which means that payments collected today are immediately used to pay benefits. Until recently, more payments were collected than were needed. So Social Security lent the money to the government, which used it for other things, which in effect masked the size of the federal budget deficit. In exchange, Social Security received interest-bearing Treasury securities, which now total more than $2.7 trillion.
As we have repeatedly explained, the bonds held by Social Security are backed by the full faith and credit of the U.S. government. The bonds are a real asset to Social Security, but they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt.
The Congressional Budget Office tracks the flow of money in and out of Social Security. So here is a summary of the data for fiscal 2013. To keep things simple, we include transfers made for the payroll tax holiday as part of "other income."
Social Security income (in billions)
• Revenue: $675
• Interest: $110
• Other income: $70
Total income: $854
Total outgo: $819
This looks like surplus, about $36 billion after rounding.
But notice that fully $110 billion of the income was interest on Treasury securities. That interest is simply paid with new bonds. So when that money is subtracted, the actual cash flow is negative -- and getting worse.
In 2012, the cash flow deficit was $58 billion. In 2013, it will be negative $75 billion -- and then negative $82 billion in 2014. By 2016, the trust fund for disability insurance will be exhausted, so in theory, full disability benefits could not be paid.
As we noted before, this is partly a matter of theology. Democrats look at those trust funds and see actual assets, built up over time, that must be honored.
In their view, the government's general fund -- which is now making payments to Social Security to cover the cash flow shortfall -- has benefited greatly in the past 30 years from annual Social Security trust fund surpluses that were invested in Treasury securities. In other words, Social Security has helped finance deficit spending in the rest of government -- rather than contributing to those deficits. So any cash flow problem should be viewed as a deficit in the general fund rather than in Social Security.
The other argument is that this is just paper shuffling.
Ultimately, those bonds are part of the overall U.S. national debt. In other words, it doesn't matter what happened in the past with Social Security monies; what matters is whether Social Security is generating enough money today to pay for its bills on its own. The plain fact is that it is not, and thus it adds to the government's overall fiscal imbalance.