By Marty Wolfson
Shortly after the ceiling on federal debt was raised on October 17, 2013, the conservative Heritage Foundation notified its readers that the outstanding debt of the United States had “rocketed past $17 trillion,” and that “entitlement spending—the key driver of spending and debt—remains unaddressed.” The three assumptions in that statement—that the true measure of our debt is $17 trillion, that the cause of the buildup of debt is entitlement spending, and that therefore the appropriate policy to “address” this problem is to cut Social Security benefits and other “entitlements”—are endorsed by many politicians and policy pundits in Washington. But they’re all wrong as economic analysis and disastrous as policy recommendations.
Seventeen trillion dollars certainly sounds like a big, scary number, especially when national debt clocks tell us that this translates into more than $53,000 for every person in the United States. But we shouldn’t be focusing on that number.
The $17 trillion figure is a measure of “gross debt,” which means that it includes debt owed by the U.S. Treasury to more than 230 other U.S. government agencies and trust funds. On the consolidated financial statements of the federal government, this intragovernmental debt is, in effect, canceled out. Basically, this is money the government owes itself. What is left is termed “debt held by the public.” It is this measure of debt that is relevant to a possible increase in interest rates due to competition for funding between the private and public sectors. It is also the category of government debt used by the Congressional Budget Office and other analysts. (Of course, the full economic significance of any debt measure needs to be considered in context, in relationship to the income available to service the debt.) The total debt held by the public is $12 trillion.
The Social Security Trust Fund owns $2.7 trillion of the $5 trillion of Treasury securities held in intragovernmental accounts. In fact, Social Security is the largest single owner of Treasury securities in the world, surpassing even China’s significant holdings of $1.3 trillion.
Social Security accumulated all these Treasury securities because of the way that its finances are organized. Social Security benefits to retirees (and to the disabled) are paid for by a payroll tax of 12.4 % on workers’ wages (with 6.2% paid by the worker and 6.2% paid by the employer), up to a limit, currently $117,700. If, in any year, Social Security revenue is greater than what is needed to pay current retiree benefits, the surplus must, by law, be invested in Treasury securities (most of which are “special obligation bonds” issued only to the Social Security Trust Fund).
Since 1983, workers have been paying more in Social Security taxes than what was needed to pay retiree benefits. A special commission, appointed by President Reagan and chaired by future Federal Reserve Chair Alan Greenspan, recommended several changes to increase the revenue received by the Social Security Trust Fund. Most prominent among these changes was an increase in the payroll tax rate to its current level of 12.4 percent, although the Commission also recommended reductions in benefits, including a gradual increase in the retirement age from 65 to 67. The effect of the changes would be to create significant surpluses in the Social Security Trust Fund. The thinking was that, if in the future payroll taxes fell below benefits, the Trust Fund could draw upon the accumulated surpluses to pay benefits.
Therefore the $2.7 trillion of Treasury securities held by the Trust Fund came about not because entitlements are out of control and the government has been forced to borrow to meet retiree benefits, but rather because future retirees have paid more taxes than necessary to meet benefit obligations. Workers have essentially been prepaying into the Trust Fund in order to provide for their future benefits.
So it makes no sense to try to solve the supposed problem of too much government debt by cutting benefits for current and future Social Security recipients. These workers were asked to help keep Social Security solvent by paying increased payroll taxes. As a result, the gross federal debt increased. It would be totally unfair and irrational to cut benefits now because these workers had sacrificed in the past. That would be hitting them with a double burden, the second burden of benefits cuts incurred because there was the first burden of overpaying payroll taxes into the Trust Fund.
What’s more, the strategy the Heritage Foundation advocates would make the alleged problem they are claiming to address even worse. That’s because cutting benefits would mean that payroll taxes would more easily meet retiree benefits, and so the surplus accumulating in the Social Security Trust Fund would be greater. Since the Trust Fund is required by law to invest its surpluses in Treasury securities, a greater surplus translates into more bonds being accumulated by the Trust Fund, and therefore a higher gross federal debt (assuming that Treasury borrowing from other sources remains the same). So cutting Social Security benefits in order to reduce a $17 trillion debt would produce the contradictory result that that debt would be even higher than it would have been without the benefit cuts.
Despite the 1983 changes to Social Security, the Trustees, the board that oversees Social Security, stated in their 1995 annual report that the 75-year projection of Social Security finances was no longer in “close actuarial balance” and that the long-range deficits should be “addressed.” In 2002, they began to be more specific: “Bringing Social Security into actuarial balance over the next 75 years could be achieved by either a permanent 13 percent reduction in benefits or a 15 percent increase in payroll tax income, or some combination of the two.”
Of course, the assumptions used by the Trustees, their policy approach, and the need for benefit cuts are all a matter of dispute. However, had benefits been cut by 13 percent beginning in 1996, total reductions would have totaled $1.2 trillion by 2012. So the Trust Fund would have accumulated that much more in Treasury securities, and the gross debt would actually have increased to $18.2 trillion.
In reality, the bonds in the Social Security Trust Fund are primarily a political accounting device to remind us that we as a society have promised a certain level of benefits to Social Security retirees. It is true that at some point the Trust Fund will most likely need to redeem the bonds in order to pay full benefits to retirees. And it is true that the government will need to raise the funds to do this, either by borrowing from the public (selling Treasury bonds) or through increased tax revenue. But this is the case because we promised benefits to these retirees, not because there is a certain level of bonds in the Trust Fund. The benefits would be due retirees whether or not there are bonds in the Trust Fund.
So the real issue is whether or not society will keep its commitment to retirees. The agenda of those who say we have to cut benefits is really that they don’t want to meet this commitment. We should recognize that this is their agenda, and not let them hide behind the smokescreen of supposedly out-of-control federal debt.
Marty Wolfson teaches economics and is the director of the Higgins Labor Studies Program at the University of Notre Dame.