The $150 Billion Shell Game
But These Electricians Showed Up on Time
By Michael Kinsley
October 11, 1999
Web posted at: 12:20 p.m. EDT (1620 GMT)
The debate in Washington about who is trying to raid Social
Security and who is trying to save it is completely surreal for
two reasons. First, Social Security is in no danger for at least
a couple of decades. It is uncharacteristic for politicians of
both parties to seem so concerned about such a distant threat.
But second, this debate will have no effect on Social Security.
That's not opinion or prediction: that's mathematics.
Republicans and Democrats say they want the budget to balance
without counting the Social Security surplus. It's an admirable
goal for many reasons, but the safety of Social Security is not
Social Security currently brings in almost $150 billion more a
year in payroll taxes than it pays out in benefits. So suppose
the government balances the non-Social Security budget. What
happens to the Social Security surplus? By law, it is invested in
special government bonds. (Even if there is no deficit, the
government still must issue bonds to replace ones that mature.)
So the Social Security trust fund will add $150 billion to its
collection of government bonds, and the government will sell $150
billion less to the public.
And what if the government spends more than it takes in, apart
from Social Security? Deplorable, to be sure. But what happens?
The Social Security trust fund still acquires $150 billion in
government bonds. If, say, there is a $50 billion non-Social
Security deficit, government borrowing from the public will be
$50 billion higher than if the budget was balanced--but $100
billion less than if there weren't a $150 billion Social Security
surplus. The government owes somebody an extra $50 billion, but
the situation of the Social Security trust fund is exactly the
same in either case.
Maybe you're thinking, Yes, but this wouldn't be true if the
trust fund could be invested in private securities, as many
experts and securities dealers have suggested. Well, you're
wrong. Even if the government ran a $150 billion non-Social
Security deficit, the trust fund would still have $150 billion to
invest. Every dollar the trust fund invests in private-capital
markets is an extra dollar the government must turn around and
borrow from these same markets, and the non-Social Security
deficit has no effect on this melancholy equation.
If you dip into your 401(k) account to pay current expenses, it
will leave you less money to retire on. Why isn't the same true
of the Social Security trust fund? First, because as a legal
matter, Social Security payments are a government obligation
completely unconnected to the size or existence of the trust
fund. Congress may amend future benefits, and the size of the
trust fund might influence its decision whether to do so. But
neither the trust fund's size nor what the money is invested in
is affected in any way by the government's non-Social Security
budget. If the government were to default on its bonds, the trust
fund would suffer a loss and (though there is no necessary legal
connection) payments might have to be reduced. And a larger
government deficit makes a default more likely. But the chance of
the government's defaulting either on its bonds or its Social
Security obligations is infinitesimal, and the effect of even a
$150 billion deficit on this chance is tinier.
The fantasy debate over raiding Social Security for general
government operations is especially weird because what is
actually happening is the opposite. Both parties have agreed in
principle that some part of the future government surplus should
go to saving Social Security. In other words, general tax
revenues will be poured into the Social Security trust fund and
used to finance benefit checks.
This has happened without debate or controversy. Where are all
the people who have spent the past decades shrieking that the
trust fund meant Social Security was self-supporting and that
therefore benefits were beyond dispute? The argument was always
nonsense. The people paying in money are different from the
people drawing it out, so the size of the pay-in says nothing
about the justice of the payout. And where are the trust-fund
zealots now? If it's immoral bordering on treasonous to raid the
Social Security trust fund for other government purposes (though
all that means is borrowing the money with interest), why is it
not even controversial to raid general revenues to shore up
Social Security (with no interest or even payback of principle)?
The proper way to save Social Security is a mild pruning of
benefits for the better-off half of the retired population, in
order to keep the trust fund growing for future retirees. If a
budget surplus actually does materialize, worthwhile goals like
health care for the uninsured or--yes--even a tax cut ought to come
before pouring more money into the trust fund. Where is the
courageous politician who will say it's time to stop Social
Security from raiding the government?
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Cover Date: October 18, 1999