The future of the Social Security system: Part six

Stephen<lovejoy@msu.edu> Lovejoy, Michigan State University Extension - September 10, 2015

Is the Social Security budget separate from the general Federal budget?

Many believe that there is no relationship between the Social Security budget and trust fund and the rest of the Federal budget. However, as pointed out in this article by Michigan State University Extension, it interacts with the broader federal budget in many ways.

There are two different ways to look at Social Security: as its own isolated “off-budget” program or as part of the broader “unified” budget. We discuss these two frameworks in detail in our 2011 paper, “Social Security and the Budget.” Both of these frameworks are valid, and both show the program to have a financial problem. If treated in isolation, Social Security is on the road toward insolvency. If treated as part of the unified budget, Social Security is adding to the deficit, and this effect will increase over time.

If viewed as an off-budget program, Social Security does not directly add to the “on- budget deficit.” However, it indirectly contributes to the on-budget deficit because the interest payments it receives from the general fund are on-budget. According to General Revenue and the Social Security Trust Funds, it also receives funding from income tax revenue on Social Security benefits, which is technically on-budget, and has at times received general revenue transfers to compensate for policies that would reduce Social Security revenue (such as when lawmakers cut payroll taxes in 2011 and 2012).

Viewing Social Security as a self-financed program is not a reason to exclude it from fiscal constraints. In fact, this view highlights the need to make the program solvent for its own sake, without relying on general revenue transfers or borrowing. To be self-sufficient, the program would need changes to bring benefit spending in line with revenues.

Although Social Security is excluded from on-budget calculations, most economic analysts consider the unified budget deficit to be a more meaningful measure of the government’s fiscal health, as it better measures the budget’s impact on the economy. The Social Security system has been contributing to unified budget deficits on a cash-flow basis since 2010 and will continue to do so indefinitely. The federal government will have to borrow more, cut other spending, or raise taxes to make up for the Social Security system’s cash-flow deficit.

The trustees noted the impact of the Social Security program on the federal budget, writing in their recent report:

The trust fund perspective does not encompass the interrelationship between the Medicare and Social Security trust funds and the overall federal budget ... From a budget perspective, however, general fund transfers, interest payments to the trust funds, and asset redemptions represent a draw on other federal resources for which there is no earmarked source of revenue from the public. In the past, general fund and interest payments for Medicare and Social Security were relatively small. These amounts have increased substantially over the last 2 decades, however, and the expected rapid growth of Medicare and Social Security will make their interaction with the Federal budget increasingly important.