Wednesday, July 28, 2010

Social Security and the Deficit

Here’s another chapter in the series, “Things everybody knows, but which are absolutely false as to actual fact.” This one, as with preceding chapters, is not limited to Republicans but is echoed by many Democrats and is sometimes stated due to simple error rather than malice because it is a lie that has been spouted so many times that it has attained the status of “common knowledge.”

Graph OneGraph Two

One of the largest single items in the federal budget is Social Security: it consumes more than 20% of federal revenue, and in order to do anything about the federal deficit and the national debt we will have to reign in Social Security spending.

That statement, and those charts, are totally false in every respect.

If Social Security payments stopped completely, if the program were eliminated in it’s entirety overnight, it would have no effect whatever on the actual current federal deficit, and it would not reduce the national debt by a single penny. It would reduce the apparent federal deficit, but that would merely be the removal of an illusion perpetrated by the government.

Let’s use a simpler analogy, one not complicated by political rhetoric and the issue of government bond purchases made by Social Security.

Suppose a lawyer wins a $1 million case for a client on a contingency fee basis, where his fee is 33% of the judgement. The defendant pays up and the lawyer puts that entire $1 million into his own account, pays out money to his client from time to time as the client needs it but meanwhile uses the money as if it were his own. What would happen? The lawyer would be charged with “commingling funds,” would lose his license to practice law and would probably go to jail.

The proper way to handle that money is for the lawyer to put that money into a “trust account” and then to pay himself the 33% fee from that account, along with his expenses, and then hold the rest of the money in that trust account for the client where it is safe for the client’s exclusive benefit. That is, in fact, the way that legitimate lawyers do it.

The Social Security funds deducted from paychecks are held in a similar trust account for the future payments of benefits to retirees and disabled persons. The government has borrowed from that trust account, in fact the SSA is required to buy government securities with any excess funds it collects, but that does not eliminate the separate nature of the cash flow; in terms of revenue and spending the money is separate from the federal government's general budget.

At some point the government decided to report them as combined cash flow because the SSA revenue generates excess cash flow and combining them makes the deficit look smaller, but that is merely a matter of appearance. The national debt is still getting larger at the same rate, the amount of negative federal revenue, and the SSA trust fund is increasing by the amount of excess SSA cash flow.

In the table above, the government would like you to think that the deficit was only $1.6 trillion and that the national debt only increased by that amount, but in reality the national debt increased by $2.17 trillion, the actual amount of the federal deficit, and the SSA trust fund increased by $570 billion. In the Clinton years of “budget surplus” claims, so much of the “surplus” consisted of excess Social Security revenue that the national debt increased every single year.

So altering the payments of Social Security benefits cannot affect the true federal deficit, and has no effect on the national debt; it can only affect the balance of the Social Security trust fund. The claim that “to control federal spending we need to get a handle on Social Security” is utterly false, because Social Security is not part of federal spending.

Medicare is a similar situation, although it is not fully funded by the trust fund and so there is a portion of the Medicare cost that is covered by federal revenue. I haven’t studied that issue, so I don’t know the precise numbers, but a large part of the reported expense and revenue for Medicare is false; it is actually trust fund cash flow on the same principle as Social Security.

imageAn actual pie chart for federal spending would look something like this. I’m not certain as to the precise accuracy of this one, but I believe it accurately shows that more than half of actual federal revenue spending is devoted to present and future military costs, which I find more than a little bit frightening and should probably write at length about in a future article.

So, anyway, why do politicians seem so hell-bent on gutting Social Security? Well, you’d have to ask them to be certain, and they’d probably be less than entirely honest about their reasons, but I do have one suggestion as to motive.

We are nearing the point were SSA cash flow will no longer be positive, and that excess will no longer be available to conceal, or at least partially conceal, the federal deficit. Furthermore, immediately after that happens the government will begin having to repay the money it has borrowed from the SSA trust fund, making the deficit even larger, because those repayments will contribute to the deficit. The politicians who are in office cannot be certain that they will have retired by the time that happens.

If they can reduce SSA benefits they can reduce the need to repay that debt. That is to say that if they can make Social Security renege on the promises it has made to those for whom it holds the money in trust, then they can renege on part of their debt.

I don’t think the politicians would phrase it in quite those words, and I’m not sure how wise that policy actually is; renege on part of your debt hoping that the rest of your creditors won’t notice and will keep lending you money.

And the numbers in the budget table have no basis in fact; they are merely ficticious numbers that I pulled out of... Well, wherever.

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