Crisis, Social Security and the Federal Debt

In a recent post, I tried to demonstrate that the Social Security Trust Fund was of no actual significance.

It has become clear that arguments are ongoing as to the timing and existence of something called a Social Security crisis. The following posts address this issue, with a mix of truths and untruths.

Brad Delong

Brad Setser

Matthew Yglesias

To understand the fundamental relationship among all the moving parts, it helps to imagine a simpler version of reality.

First, consider the Federal Budget if Social Security did not exist at all. Assume that all taxes and expenditures are unchanged going forward into the indefinite future.

Under this assumption, a permanent budget deficit would occur annually, and not include any contributions from a current Social Security surplus. This would result in a Federal Debt that increases by a constant absolute amount every year. Because the government cannot borrow at a zero percent interest rate, the required interest payments actually cause the Federal Debt to increase at an accelerating rate, by an increasing amount every year.

If we then bring Social Security into the picture, assuming no changes to it, with its current surplus projected to fall through zero in about 2018 and continue further into deficit, what changes occur?

First, current borrowing is reduced by the amount of the current Social Security surplus. Secondly, this reduction in borrowing gets smaller and smaller up until 2018, and then the borrowing will become greater and greater as the Social Security yearly deficit grows.

The net result of all this is, that although the current debt is smaller in an absolute sense than it would otherwise be up until 2018 because of the Social Security surplus, from the present up through at least two or three generations, the debt will be increasing at an even higher accelerating rate than that due to interest payments alone.

There is no near term future crisis, but only because we are already in the midst of a process of an ever accelerating Federal Debt. There is no magic about 2018, or 2042 or any other date, until a point sometime further in the future might occur when Social Security might go back into a constant shortfall between income and outflow. At that point, the effect of Social Security on the debt would become one of a constant increase, not an accelerating one.

None of this has anything to do with an imaginary Social Security Trust Fund. All that matters is the pattern of Social Security surplus or deficit year by year set in motion by law, and combining that with general taxes and expenditures.

Share this