The Real Risk to Social Security

Last Updated Feb 1, 2011 3:48 PM EST

Nothing get clicks from seniors like a scary story about Social Security, and the Associated Press supplied a real granny-grabber last week: Social Security on Pace to be Drained by 2037. Hyper-ventilating off a new report from the Congressional Budget Office, the headline managed to seize a topic of key interest and entirely miss the point.

To understand what's wrong with such a headline, you need to grasp one fact: Social Security is, ultimately, just another pay-as-you-go government transfer program. That is, we tax Peter to pay Paul. The Treasury raises money with taxes and debt and distributes some of it to seniors, survivors, and disabled people according to formulas embedded in the Social Security law. Your benefits are safe as long as voters agree that transferring that much money to seniors is better than transferring it elsewhere, or letting taxpayers keep it. Simple.

What makes it seem complicated is that Uncle Sam's accountants treat Social Security like a closed ecosystem. Unlike other government programs, it has its own tax -- this year a 10.4% slice of your wages (4.2% from you and 6.2% from your employer) officially called the FICA tax -- and every year the Social Security trustees estimate how long the system's inflows from FICA and other revenues will cover its outflows.

But where the system really turns murky is with the trillion-dollar Social Security trust fund, an accounting phantom that has launched a thousand half-cocked headlines like AP's. Social Security experts like Eugene Steuerle of the Urban Institute regard it as a trillion-dollar distraction. "I try to avoid the trust fund debate," he writes in an email. "Social Security is mainly a pay-as-you-go system."

There is a massive trust fund -- and this is one case where your definition of "is" really matters -- only because FICA has pulled in much more than Social Security needed for the past 27 years. The government treated the FICA surplus the same way it treats all tax revenue: It spent it on aircraft carriers, interest on the debt, haircuts for Congressmen, and all the other purposes of government. The surplus, along with imputed interest, is recorded on the government's ledgers. That ledger entry is the trust fund.

What does the trust fund do? The Social Security Administration itself describes it as "budget authority." That is, until the fund runs out, the program can order the Treasury to come up with the money to pay benefits, even if FICA taxes don't cover benefits (and they don't, starting this year), without asking Congress for more money.

What the trust fund doesn't do is change how the Treasury pays for benefits: Trust fund or no trust fund, we still have to tax Peter to pay benefits to Paul. If Peter's FICA taxes don't cover Paul's benefits, the shortfall has be made up out of Peter's other taxes, or by borrowing. All that matters is how much we want to support seniors, not whether government accountants say the trust fund is a $2.6 trillion or 50 cents.

In the kind of Social Security post you should pay attention to The Truth about Social Security Cuts MoneyWatch writer Carla Fried argues persuasively that voters (including most Tea Party members) support Social Security so strongly that benefits are in zero danger in the short run. Certainly, no politician has enough of a career death wish to propose stiffing anyone now retired or even within 10 years of retirement.

The question anyone younger than 50 needs to ask is, how long will that popularity last? At some point, as the population ages and seniors absorb an ever larger share of spending -- not just in Social Security, but also in Medicare and Medicaid -- voters may simply choke on elderly entitlements. (Remember at that point we may simultaneously be choking on interest payments on the debt.) Ironically, the best way to protect benefits for younger workers today is to embrace gradual changes in the program starting today--thus avoiding more draconian cuts in a crisis a decade or more hence.

In the meantime, forget about when the Social Security trust fund will be "drained." Indeed, forget about the trust fund altogether. It's irrelevant. As with all the fiscal challenges we face, Social Security's biggest risk is failure of political will. There's no trust fund for that.

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  • Eric Schurenberg

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