Does Social Security Contribute to the Deficit?

Last Updated Sep 16, 2011 10:09 AM EDT

The Obama administration recently announced that it would not recommend to the debt super committee that Social Security be modified, stating that the program won't contribute to deficits in the near or medium term. This puts the Social Security hot potato back in the Republicans' court, the party that's already smarting over the brouhaha surrounding controversial statements made by Rick Perry, who called Social Security a "Ponzi scheme" and a "monstrous lie."

So what's the real story? Does Social Security contribute to the deficit or not?

It depends on how you account for Social Security. According to the intermediate projections in the 2011 Social Security trustee's report, projected benefit payments this year from the fund used to pay Social Security benefits are $738 billion, while projected income from Social Security taxes are $693 billion, creating a deficit of $45 billion. This deficit is projected to grow to $99 billion by 2020. By this measure, Social Security is definitely contributing to the deficit.

But this ignores the interest made on the Social Security trust fund; this amount is projected to be $115 billion in 2011, which will more than offset the $45 billion deficit reported above. And by 2020, that same interest income is projected to be $172 billion, which offsets the $99 billion deficit projected nine years from now. By this measure, Social Security is definitely not contributing to the federal deficit.

But who pays for the interest income on the Social Security trust fund? Well, we do, through our income taxes and more federal borrowing. The total federal deficit includes interest payments on the Social Security trust fund, so when you consider who's paying for the interest on the trust fund, Social Security is, in fact, contributing to the federal deficit.

On the other hand, the Social Security trust fund represents the accumulated value of Social Security taxes that we paid during the past two decades that exceeded the benefit payments, so it's only fair that this trust fund earns interest, right?

By now, your head's probably spinning faster than Linda Blair's in The Exorcist!

To sum it up, technically speaking Social Security does contribute to the federal deficit now, given the way the deficit is officially counted (income vs. benefits outgo). This follows years in which Social Security reduced the official federal deficit, with FICA taxes collected exceeding benefits paid.

So if our leaders reduced Social Security benefits now, that would help reduce the federal deficit as well as the growth in the federal debt. This is the hard reality of deficit accounting and the operation of the total federal debt.

You may not think that it would be fair to reduce Social Security benefits to cut the deficit, given the operation of the trust fund described above, and that we supposedly paid for our benefits with our Social Security taxes over the past two decades. I agree -- it's not fair. However, the debt super committee will need to find a way to balance the goals of fairness with the reality of deficit accounting when making their deliberations -- they can't do both at the same time. I'm reminded of JFK's famous quote: "Life is not fair."

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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