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In-the-Red State

Wednesday, May 12, 2010

When we properly account for Social Security, our national deficit proves worse.

This year for the first time since 1983, Social Security will pay out more in benefits than it receives in payroll taxes and is hence running a cash-flow deficit. This is an important threshold. It was also not expected for another six years.

Some observers argue that the situation shouldn’t cause alarm. As the theory goes, when Social Security starts registering a cash deficit, the shortfall is made up by withdrawals from trust fund assets. In addition, in spite of the cash-flow deficit, the trust fund will continue to show net growth until 2023 because of the interest generated by its bonds.

In May 2009, the Social Security Trustees' annual report projected that revenue for Social Security would reach $848 billion, including $120 billion in interests collected on its $2.5 trillion holdings of Treasury bonds.

In practice, however, the trust fund and interest payments it receives are simply accounting fiction. For years, the federal government has been borrowing the Social Security Trust Fund assets for its daily spending. The fund has nothing left in it except IOUs from the federal government. In fact, even the interest is paid in IOUs.

Hence, the only way Social Security will not go into the red this year and in future years is if the federal government pays back Social Security. But since the money has long ago been consumed, it must borrow money from the public or raise taxes to pay its Social Security debts.

The chart below shows what federal deficits look like if the government borrows that money. In 2010, the shortfall is $29 billion. The shortfalls get smaller in 2011–13 and turn into small surpluses until things start to go into the red again in 2016, after which the numbers get much worse. Each dollar that the government borrows increases the deficit, which adds up to current deficit numbers, represented here as a percent of the Gross Domestic Product.

Long-Term Deficit Projections plus Projected Deficits in Social Security Accounts

deRugy5.11.10

Furthermore, since Medicare surpluses have also been re-allocated through intragovernmental lending, it can be shown through analogous arguments that the national deficit should be increased even more to reflect that reality.

This is cause for alarm.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: De Rugy has been inspecting government healthcare and entitlement spending for months. Her most recent forays into this field include “America’s Precarious Net Position,” “Mediscare: Our Government-Administered Insurance Looks Into the Abyss,” “What Unsustainable Looks Like,” “The High Cost of No Price” for healthcare, and “Why Reform Will Cost Taxpayers More, Much More.” The American Enterprise Institute’s Norman Ornstein says “Fiscal Sanity and Political Sanity Are Needed on Budget,” while Andrew Biggs discusses the “Entitlement Apocalypse.”

Image by Rob Green/Bergman Group.

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