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The most recent Social Security Trustees report projects that, in 2018, Social Security will have income of $828.2 billion and expenses of $853.6 billion, implying a deficit of $25.4 billion. But don’t worry about Grandma getting her check; the system will draw on its reserves of $2.8 billion to cover the deficit.
The report also projects that these “reserves [will] become depleted in 2034.” Maintaining the system will require “a permanent 3.87 percentage-point payroll tax rate increase … starting in 2034, or a reduction in scheduled benefits … [of] 23 percent … starting in 2034, or some combination of these approaches …”
Thank heavens Social Security has reserves. We have 16 years to fix the system, right? Think again: The reserves are part of the problem.
The nearly $3 trillion of reserves were accumulated in years when Social Security collected more in payroll taxes than it paid in benefits. But Social Security turned its excess cash over to the U.S. Treasury, which proceeded to spend the funds and issued Social Security interest-bearing IOUs for the amount.
Starting in 2010, Social Security’s tax collections fell short of its payment obligations. Interest on its accumulated IOUs have covered the shortfall the last eight years. This year, they will not be enough—so the reserves themselves will be drawn down. Note, however, that the reserves don’t really exist. Since 2010, the U.S. Treasury has borrowed funds to cover its interest payments to Social Security. In reality, then, since 2010, Social Security has been financed by U.S. Treasury borrowing (aka federal deficits)—and this continues until 2034.
Now, suppose there had never been a reserve fund. Suppose Social Security had historically turned its excess revenue over to the U.S. Treasury and no corresponding IOUs had been issued. (This is what the Federal Reserve does with its excess funds.)
Back in 2010, when Social Security’s tax collections fell short of its payment obligations, Congress would have had to do something: Raise payroll taxes, reduce benefits or explicitly authorize the U.S. Treasury to borrow funds to cover Social Security deficits.
All the reserve fund does is allow Social Security’s future shortfalls to be baked into the fiscal cake; it allows Congress to kick the can down the road until 2034. Had there been no reserve fund, Congress would have had to start solving Social Security’s problems nearly a decade ago. A reserve fund sounds great on paper, but it’s a bad fiscal design. It puts congressional irresponsibility on steroids.•
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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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