Forgive me if I am confused.
On May 13, 2013, the Social Security Board of Trustees released its annual report on the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds. A few salient points:
- In 2012, the OASDI Trust Funds had $840 billion in income, including $509 billion in contributions, $27 billion from taxation of benefits, $109 billion in interest on trust fund assets, and $114 in reimbursements from the General Fund of the Treasury (a product of the payroll tax reductions that were used as a stimulus)
- Total expenditures were $786 billion. That leaves a surplus of $54 billion. As a result, at the end of 2012, the assets of the OASDI Trust Funds were $2.73 trillion. With an effective annual interest rate of 4.1 percent, it would appear that things are in good shape.
Indeed the Trustees report:
“The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.”
“The projected point at which the combined trust fund reserves will become depleted, if Congress does not act before then, comes in 2033 – the same as projected last year. At that time, there will be sufficient income coming in to pay 77 percent of scheduled benefits.”
But now, we are told that a failure to raise the debt limit could have devastating consequences for Social Security. As the WSJ reports:
The Social Security Administration has begun warning the public it cannot guarantee full benefit payments if the debt ceiling isn’t increased.
When asked by the public, the agency is notifying beneficiaries that “Unlike a federal shutdown which has no impact on the payment of Social Security benefits, failure to raise the debt ceiling puts Social Security benefits at risk,” according to a person familiar with the agency directive.
The same kinds of warnings were issued in 2011.
How do we make sense of this? A simple response is that the administration is simply frightening senior citizens in hopes of extracting additional political benefits out of GOP’s odd strategy. A more ominous interpretation—and one that makes far more sense—is that Social Security payments do, in fact, depend on the nation’s ability to access debt markets. Of course, the two are not mutually exclusive.
When processing news about Social Security, all you have to remember is a few things:
- Money from the payroll tax flows into the Treasury and (according to the Social Security Administration) “is deposited on a daily basis and is invested in ‘special-issue’ securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.” These bonds and the interest they generate constitute the OASDI Trust Funds surplus.
- The OASDI Trust Funds can redeem the bonds (e.g., when expenditures exceed income). In this case, the Treasury will provide the funds out of general revenue ordebt markets.
- While the OASDI Trust Fund surplus is $2.73 trillion, its value is totally dependent on the capacity of the Treasury to extract revenues (from the same people who pay the payroll tax) or borrow.
As a result, any constraints on the ability of the Treasury to access debt markets could compromise the Social Security Administration’s ability to redeem its bonds and meet its obligations.
I doubt that (1) Congress will refuse to raise the debt ceiling; and (2) if it failed to do so, cuts in Social Security benefits would come before further cuts in domestic discretionary spending or the elimination of the Ministry of Silly Walks. But when you understand the logic of the system, the ramifications of the debt ceiling debates seem minimal when compared to larger demographic trends and the ongoing problems of fiscal sustainability.
If the past is any guide, genuine reform proposals in entitlements will be met with a simple response: Why worry? The trust funds are in surplus and 2033 is a long time away. All of this assumes that the key date is the depletion of the OASDI surplus, not the date on which the Treasury will no longer be able to meets its obligations through revenues and additional debt.