RidgewoodJOLT-Activism

by Clara S. Licata

Recently, Senate Majority Leader Mitch McConnell has admitted that Republicans are “gunning” for Social Security and Medicare.  They view these programs as “entitlements,” a term that has come to have pejorative connotations at time, even though the basis for the entitlement is that the payments have been earned.  This is nothing new in conservative circles.  What is new now is that the GOP is now trying to shift the blame for the current federal budget deficit to these programs.  This tactic demands an examination of the relationship between Social Security/Medicare and the federal budget deficit.  This is a complicated problem for which there are no easy solutions. It demands bi-partisan attention, not bombast and rhetoric from both sides.

A counter-argument has been circulating in media that Social Security does not contribute to the deficit because it is self-funded through a payroll tax and Medicare is funded through a combination of payroll tax and premiums paid by recipients.  Social Security in particular has been described as “off-budget,” in that the Social Security Trust Fund is not considered to be part of the federal budget, to protect trust fund surpluses from being diverted into other programs.

This is an attractive argument, but when researched really does not withstand scrutiny.  Other commentators have noted that labeling Social Security as “off-budget” is just a matter of accounting reporting and does not reflect economic reality.  For example, the 2018 Social Security OASDI Board of Trustees Report states that Social Security and Medicare together accounted for 42% of federal program expenditures in fiscal 2017 and the “unified budget” reflects trust fund operations.  Thus, the report states, even when there are positive trust fund balances, any drawdown of those balances and interest payments to the trust funds that are used to pay benefits increases pressure on the unified budget.

A deeper understanding of how this system works is necessary.  The only disbursements permitted from the trust fund are benefit payments and administrative expenses.  Federal law requires that all excess funds be invested in interest bearing securities backed by the full faith and credit of the United States.  The Treasury Department currently invests all program revenues in special non-marketable securities of the U.S. Government which earn interest equal to rates on marketable securities.  When Social Security and Medicare payroll taxes are collected in excess of immediate program costs, funds are converted to Treasury bonds and held in reserve for future periods.  Thus, accumulation of assets in the trust funds improves the unified federal budget position.  When trust funds are drawn down to pay scheduled benefits, bonds are redeemed and interest payments are made, creating a current year cost to the unified federal budget without any new income coming in.  Thus, when the unified budget is not in surplus, these payments are made through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public in the form of issuing more bonds.

The investing of trust fund assets in U.S. government securities has been called intergovernmental debt.  This is important because national debt has been defined as total national debt, excluding intergovernmental debt.  Each dollar of FICA surplus, when it exists, decreases the degree that the federal government needs to borrow from the outside and each dollar of trust fund bond redeemed (to make social security payments) is another dollar that requires the issuing of more bonds to borrow that money. Congress would not default on these bonds, but to keep the trust fund bonds unspent, the government must reduce social security spending, either by boosting the retirement age, a benefit phase out based on income, or some other mechanism.

Thus, social security benefits are part of the overall governmental spending picture. Between now and 2034, when the Social Security Trustees predict the trust fund surplus will run out, Congress must pass some kind of legislation or general revenue funds will need to supplement FICA revenues.

Now it is necessary to examine the current federal deficit.  The Treasury Department puts the current budget deficit for the end of the 2017-2018 fiscal year at $779 billion.  The Congressional Budget Office projects it at $973 billion for the 2018-2019 fiscal year and the CBO predicts it will rise to over a trillion dollars in the next decade. It is generally agreed that this huge increase in the deficit since 2017 is due to the tax cuts enacted that year.  This legislation temporarily reduced individual income tax rates, nearly doubled the standard deduction, modified or eliminated certain deductions or exemptions, and temporarily allowed firms to deduct the cost of capital investments immediately.Hence, the calls to reduce Social Security and Medicaid “entitlements” to relieve this deficit.  But will cuts in entitlement programs have any effect on closing the deficit?

Medicare as a form of health insurance is less generous than most insurance plans for the non-elderly.  Expanding coverage and requiring well to do elderly to pay more is one solution, but the number of well to do wealthy is too small to have an impact on this.  As to social security, the age at which benefits can be claimed has risen, but does simply raising the age without changing the amounts paid save any money? Those who claim benefits at a later age automatically receive larger benefits that just offset the shorter period in which they can expect to receive benefits.  Full or partial privatization has been floated as a solution, but it is projected that will add administrative costs and will not achieve any real saving.

Another proposed solution is cutting benefits.  Until Mitch McConnell, no politician in his right mind has seriously proposed such a thing.    In declaring that Republicans are “gunning” for Social Security and Medicare, he is suggesting that it is acceptable to renege on the commitment of assuring that the elderly and disabled will have basic income and health coverage in exchange for extracting a payroll tax and premiums.

The 2017 tax cuts were touted as reducing taxes for most Americans, with a corresponding increase in their pay checks.  The jury is still out on this, with reports varying.  In June 2018, one survey reported an average monthly increase of $130.56 in workers’ paychecks.  In August, Business Insider found that workers’ wages have been flat to lower since the tax cuts.  But proportionately speaking, the real beneficiaries of the tax cuts are the very wealthy.

It is clear that between now and 2034, when the trust fund surplus evaporates, Congress will have to pass some sort of social security legislation. This involves a real bi-partisan re-think of the best way to structure our retirement system, not knee-jerk proposals that would abandon the already inadequate social safety net the United States has crafted over the past 80 years in order to reduce a deficit hugely increased by legislation that puts more money in pockets of the already wealthy.

Sources:

26 U.S.C.A. 3101(a)

Ghilarducci, Teresa, Social Security Does Not Add To The Federal Deficit,https://www.forbes.com/sites/teresaghilarducci/2018/10/19/social-security-does-not-add-to-the-federal-deficit/#30b7c8e32081

Bauer, Elizabeth, Yes, Social Security Does Indeed Add To The Federal Deficit, https://www.forbes.com/sites/ebauer/2018/10/22/yes-social-security-does-indeed-add-to-the-federal-deficit/#4238fe0d28c4

Aaron, Henry J., Budget Deficit and Entitlements: The Grand Delusion,https://www.brookings.edu/opinions/budget-deficit-and-entitlements-the-grand-delusion/

Social Security 2018 OASDI Trustees Report: https://www.ssa.gov/oact/TRSUM/

Kurtzleben, Danielle, National Public Radio,  See How Much GOP Tax Cuts Will Go To The Middle Class, https://www.npr.org/2017/12/19/571754894/charts-see-how-much-of-gop-tax-cuts-will-go-to-the-middle-class

Hiltzik, Michael, Mitch McCconnell Says It Out Loud: Republicans Are Gunning For Social Security, Medicare And Obamacare Next,www.latimes.com/business/…/la-fi-hiltzik-mcconnell-social-security-20181019-story.html

daCosta, Pedro Nicolaci, Trump’s Tax Cuts Have So Far Failed To Deliver On One Key Promise,https://www.businessinsider.com/workers-wages-have-been-flat-to-lower-since-the-trump-tax-cuts-2018-8

Matherson, Nate, Monthly Paychecks Rise $130.76 After Tax Plan Changes | Survey & Report,https://lendedu.com/blog/tax-plan-changes-take-home-paychecks

Congress of the United States, Congressional Budget Office, The 2018 Long-term Budget Outlook, at 47, 50.