TM: Last year, the fiscal policy effort was aimed at heading off a depression. Avoiding a fiscal disaster was more important than reducing deficits. It’s more of an issue now because of the experience of Greece and Ireland and the extraordinary level of current deficits these countries have faced. The threat of chaos in the Euro world because of those countries—as well as Italy, Spain, and Portugal—has prompted an appeal for fiscal austerity.
TL: Why is Social Security being attacked and blamed for the for the deficit problem?
TM: There are a number of critics who have firmly-felt objections to Social Security’s role in American public finance. There is a fundamental policy cleavage that is perfectly understandable, and it is appropriate that there should be public debate about whether Social Security ought to be made more substantial, adjusted slightly, or cut back in some measured way. But it’s not being debated the way it should be.
That’s so because of Social Security’s popularity. To avoid attacking its popularity, critics attack its affordability. That’s always been the case, whether the program is in surplus or in deficit. Opponents have said the same thing about Social Security for three decades and more, no matter what the numbers are. Orthodoxy trumps factual discussion.
TL: So then what does Social Security have to do with the deficit?
TM: When considering government fiscal policy at any one time, total revenues and expenditures are central considerations. In that sense, Social Security, Medicare, unemployment insurance, and hundreds of other programs are relevant to measuring the state of the government’s fiscal position. Total revenues versus total expenditures is the accounting issue in that sense. But it has nothing to do with Social Security’s contribution to the deficit. American workers have, over the decades, paid enough in their FICA taxes to fund their expected levels of pensions. There have been surpluses for decades, and hence Social Security is “owed” interest on the bonds that are credited to the institution’s accounts.
The fact that previous administrations have borrowed those surpluses to finance current government expenditures is true. That along with calls for repayment of the funds borrowed earlier does not bear on the legitimacy of those obligations. In short, the Social Security program has ‘paid for’ its expected benefits, but they will have to be financed by taxes paid by future workers.
TL: But what do people mean when they say it is the cause of the deficit? What are they conflating?
TM: The current payments are part of this year’s government outlays, simply put. Since government taxes overall are less than the outlays, all government programs, Social Security included, are ‘part of the deficit.’ The conflation is between that obvious truth and the claim that Social Security itself has not been in fiscal surplus and won’t be, given its expected FICA revenues and the repayment of its loans to other government programs.
TL: Can you explain the concept of the trust funds and the “lock box” idea in terms of the public’s perception that their contributions have used to finance other programs?
TM: Social Security has had a surplus. That surplus was used to finance other programs. The ‘lockbox’ idea was a metaphor to represent what Social Security’s finances would be if no borrowing had taken place. But that image is unnecessary. The Social Security accounts are what they are, and the reality of the surpluses—and the expected payments on these repayments—mean Social Security has not itself contributed to the deficit.
TL: Is Social Security broke, or are the terms “broke” and “bankrupt” meant to scare people?
TM: Social Security in 2010 reduces the deficit from what it otherwise would be; more FICA taxes are taken in than pension benefits paid out. But then revenues will be less than taxes paid until 2016. But that doesn’t mean people won’t get their benefits. The suggestion that it’s insolvent is an absurd way of talking about the program. This is not a private household. The U.S. government is not a person, so analogies to individuals and their own budget problems are not appropriate. Governments can tax. People can’t. Governments can reduce the level of benefits, or adjust who receives them. Private citizens have no such capacity. The analogy to personal finances, when addressing Social Security (or government altogether) is a mother lode of nonsense.
Another element of the insolvency claim is the notion of unfunded liabilities. That’s an expression appropriate for private pension plans, where the promise to pay a future benefit must be balanced by holding adequate financial reserves now. That’s not the case with Social Security. The government has the authority to raise taxes and adjust benefits. Private trust funds do not. Failing to understand that is the cause of much confusion and mischief.