Democrats' Social Security Policy Dilemma; Excluding Benefits from Deficit Reduction Now Will Prove Costly Later

The Washington Times (Washington, DC), April 8, 2011 | Go to article overview

Democrats' Social Security Policy Dilemma; Excluding Benefits from Deficit Reduction Now Will Prove Costly Later


Byline: Jagadeesh Gokhale, SPECIAL TO THE WASHINGTON TIMES

Democratic policymakers appear divided on Social Security policy - whether changes to Social Security benefits should be among budget policies to reduce federal deficits. Despite Senate Majority Leader Harry Reid's recent emphatic rejection of that idea, the sizable decline in payroll taxes during the last recession has liberal-leaning policy mavens wondering whether their unconditional defense of the status quo on Social Security might backfire.

According to the Social Security trustees' 2010 annual report, the program is overpromising future benefits compared with its future revenues. The Social Security trust funds' Treasury securities, nominally valued at $2.5 trillion, will enable scheduled benefit payments without congressional legislation through 2037. But drawing down the trust funds means Social Security will add to future federal deficits - by $100 billion during 2020 and increasingly thereafter until the trust funds are exhausted in 2037. Status-quo supporters argue that Social Security did not contribute to past federal deficits and should not be changed to help reduce future ones. But Social Security will contribute to future federal deficits - those that fiscal adjustments being contemplated today are intended to reduce.

Even the claim that Social Security contributed nothing to past deficits is debatable. It depends on how one views the program's past operations. When the program was started during the 1930s, early retirees received more benefits than their payroll taxes, thus contributing a deficit to the program. As the program's benefits and taxes were increased, subsequent generations also received more benefits during retirement than their payroll taxes while working. The Social Security trustees report that under current payroll tax and benefit rules, the system's total shortfall equals $16.1 trillion. Of this, the legacy from past and current generations is a debt of $17.4 trillion ($20 trillion worth of gross debt offset by $2.5 trillion of trust fund Treasury securities) and a net projected contribution by future generations of $1.3 trillion.

But if past and current generations contributed a legacy debt of $17.4 trillion, why did it not result in high federal deficits? The answer lies in Social Security's pay-as-you-go financing, which directly transfers dollars from workers to retirees. As each past generation received more benefits than it had paid in, workers' payroll taxes were increased to fully cover those excess benefit awards so that the system's annual cash flow remained balanced or in surplus. …

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Democrats' Social Security Policy Dilemma; Excluding Benefits from Deficit Reduction Now Will Prove Costly Later
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