The guest commentary below was written by Dr. Daniel Thornton of D.L. Thornton Economics.
In an article written by David Harrison on June 6, the Wall Street Journal reported that “Social Security costswill exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits.”
Such statements perpetuate the myth that the Social Security trust fund consists of a pool of assets that can be liquidated to enable Social Security payments to be made when the Social Security taxes are no longer sufficient to pay scheduled benefits. The truth is the Social Security trust fund is an accounting device designed to create this illusion. If a major newspaper like the Wall Street Journal doesn’t understand this, how can we expect the most citizens to?
In reality, the Social Security trust fund consists of credits (IOUs) the government gives Social Security for Social Security taxes, tax revenue the government receives from taxing Social Security benefits, and interest on the IOUs the government has given Social Security. Social Security’s only real income comes from Social Security taxes. These taxes were sufficient to pay for benefits until 2010. Since then, Social Security has run a deficit—benefits paid out have exceeded Social Security taxes.
The figure below shows the actual and projected annual Social Security deficits for the period 2010 to 2034 based on data, provided by the Congressional Budget Office (CBO), see CBO’s 2017 Long-Term Projections for Social Security: Additional Information, here. The figure shows the actual Social Security deficits from 2010 through 2017 and the CBO’s projected deficits from 2018 forward. The figure shows that Social Security ran a deficit of $50 billion or more annually from 2010 through 2017.
Harrison’s statement that, “the trust fund will be depleted in 2034 and Social Security will no longer be able to pay its full scheduled benefits unless Congress takes action to shore up the program’s finances,” is nonsense. The Social Security deficits since 2010 have been financed by issuing debt which has increased the national debt by nearly $500 billion over the period 2010 - 2017. That the government would have financed the nearly $500 billion in Social Security deficits in exactly the same way if the trust fund didn’t exist is proof that the trust fund is a charade.
Like many charades, the Social Security trust fund has real consequences. It has enabled Congress to postpone making changes in Social Security that would make it truly solvent. Unless Congress acts, Social Security will continue to swell the national debt dramatically by the time the government’s IOUs go to zero: The CBO estimates that Social Security deficits will increase the national debt by an additional $5.5 trillion by 2034. Even if Congress does nothing to “shore up the program’s finances,” the government will continue issuing debt to pay for the Social Security deficits to 2034 and beyond.
Of course, this won’t happen.
At some point before 2034, the debt burden will be sufficiently large that Congress will be forced to act. But there is no reason to wait. Congress can start by dissolving the Social Security trust fund and use the taxes it wastes on this charade to reduce the deficit. Dissolving the Social Security trust fund will make it clear to everyone that Social Security needs to be fixed—the sooner the better. Congress will be under increased pressure to get down to the business of increasing taxes and/or reducing benefits.
This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.