Social Security ‘Surplus’ Must Not Be Abused

Will Social Security be used to reduce the budget deficit? The presidential candidates are trading charges about raiding the retirement system’s trust fund, and Robert Strauss, co-leader of a bipartisan commission studying ways to reduce the budget deficit and an astute Washington operator, said openly the other day: “There are no easy choices left; we have to go to Social Security, Medicare . . . and defense.”

Politicians of both parties rushed to deny that Social Security would be touched, but many voters suspect that somehow benefits will be cut. In fact, a lot of people worry that by one means or another in years to come, the politicians will dissipate Social Security and leave them with nothing at retirement.

So what’s the story? That fears and suspicions may be well founded but may also lack understanding of the brighter long-term possibilities looming in the Social Security trust funds.

In the short term, true enough, it is likely that Social Security benefits will be trimmed along with every other government expenditure to reduce the present deficit. It’s just too big to exclude from consideration. Social Security, Medicare, defense and interest on the national debt make up 73% of total government expenditure--and interest is beyond budgetary control.


So any serious attempt at deficit reduction is likely to include Social Security--with a cutback in the system’s cost-of-living adjustments to half the rate of inflation, saving perhaps $5 billion to $10 billion.

But the greatest question mark on Social Security is long term, in how we use its enormous, looming surpluses. If those cost-of-living savings are made, for example, they will swell a Social Security trust fund that is already in surplus and making the government deficit appear smaller than it really is.

Law Could Change

The Old Age and Survivors Disability Insurance trust fund--which receives tax deductions from your paycheck--is taking in more money than it has to pay out in benefits these days because the number of active workers is far larger than the number of retirees. This year the trust fund will take in $262 billion but pay out only $222 billion, leaving a surplus of $40 billion.


That $40 billion will be paid out in benefits someday, in the far future when there are more retirees. But meanwhile it is invested in special government securities, and, although by law the actual Social Security cash can’t be used for other purposes, the $40-billion surplus becomes part of the consolidated federal budget and reduces the overall deficit figure.

Not counting the Social Security surplus, the actual government deficit on all other expenditures is $190 billion instead of the $150 billion that is reported on a consolidated basis.

And the Social Security surplus will grow enormously in the next couple of decades as retirees from the low-birthrate 1930s and early 1940s will be few compared to the masses of active workers. The surpluses will grow into the hundreds of billions--presenting great dangers or opportunities, depending on how we use them.

There are fears that the government will use those growing surpluses as a camouflage for continued deficit financing on other programs. Another danger is that the Medicare trust fund--which is in deficit--would be allowed to borrow from the Old Age trust fund. And the greatest danger of all is that some future Congress, reluctant to vote for new taxes, will simply change the law and borrow from the Social Security surplus to spend on some other noble program--education, say, or housing.

The results in the next century would be devastating--because the Social Security billions are not surpluses in the true sense at all. They are advance payments on future retirements being made today by employees and employers and redeemable from around 2020 to 2030 when the great mass of baby-boom retirees will be due for benefits. If the surpluses have been dissipated and the trust fund is in deficit, the consequences will be terrible. Either the retirees will be cheated of their retirement savings or crushing taxes will have to be imposed on active workers at that time. It’s a scenario for generational warfare and social breakdown.

Happily there is an alternative to that bleak vision. And it is that the growing Social Security surplus can become a boon for our economy--a fund for national saving. It is important to understand that it can only be a boon if it is net saving, if the government does not increase deficit financing for its other activities.

But if there is discipline, then the surplus in Social Security can provide a capital cushion, minimizing the government’s borrowing in private financial markets. The result would be abundant finance for productive investment into the next century, a great and timely gift to our financial system--if we understand and don’t misuse it.