Craig Eyermann did a good job of explaining that the Social Security trust fund is projected to run out of money by 2035. The result, the Social Security Administration trustees say, is that either payroll taxes will have to be raised or benefits will have to be cut.
My message is: Social Security benefits will not be cut. My conjecture is that payroll taxes will not be raised either, but that’s not as certain.
So, what happens when the Social Security trust fund runs out of money? Here’s my best guess.
Members of Congress will observe that the Social Security trust fund has been in surplus for many decades. As its balance runs down to zero, they will propose that the federal government can lend the trust fund money and allow it to drop below zero. They will use money from other taxes, or from borrowing, to make up the difference. Nobody’s benefit will be cut.
There are two big factors to look at when evaluating the solvency of the Social Security trust fund. First, the fund is a fiction. The trust fund holds federal government bonds, so it’s one part of government lending money to another part. Right now, the trust fund is in surplus, so the Social Security program is lending money to the Treasury. If the fund fell below zero, the Treasury would be lending money to the trust fund.
What matters is not how much money is in the trust fund, but whether more is coming in than going out, or more is going out than coming in. If more is coming in than going out, the Social Security program is giving money to the rest of the federal government. If more is going out than coming in, the rest of the federal government is giving money to the trust fund.
As the link in Eyermann’s post shows, the point at which the Treasury started sending funds to the trust fund occurred around 2010, more than a decade ago. Every year, some money is transferred to the trust fund from the Treasury because the Social Security program is now handing out more in benefits than it is taking in in taxes.
The balance of the Social Security trust fund is irrelevant. If the balance falls below zero, the Treasury can continue to send that money to fund the benefits.
The reason they will is the second big factor to consider: the political support for the Social Security program. How much in benefits the program pays, and how much in taxes it collects, is purely a political decision. Congress has the power to increase benefits, cut benefits, or even terminate the program.
If members of Congress were really concerned about the solvency of the Social Security program, they could take action now. One thing they could do would be to eliminate cost of living increases. That by itself would keep the trust fund balance permanently in the green. Or, they could just reduce cost of living increases, which are already very generous. Or, they could decide to cut benefits by 5% now to avoid having to cut them by 20% in 13 years.
None of these ideas are on the table. Why? Because any reduction in benefits would be politically unpopular, both now and in the future. The trust fund is not like a bank account, in which the holder could run out of money. Its funding already comes from the Treasury because its spending is already greater than its revenues.
Whether benefits will be cut is a political decision, and politicians will not decide to cut Social Security benefits by 20%, or by any amount, when there is an easy alternative. They can just decide to appropriate money from the Treasury to make up the difference.
This article was published by The Beacon
Randall G. Holcombe
Randall G. Holcombe is Research Fellow at The Independent Institute, DeVoe Moore Professor of Economics at Florida State University, past President of the Public Choice Society, and past President of the Society for the Development of Austrian Economics. He received his Ph.D. in economics from Virginia Tech, and has taught at Texas A&M University and Auburn University. Dr. Holcombe is also Senior Fellow at the James Madison Institute and was a member of the Florida Governor’s Council of Economic Advisors.