Archive for December, 2012

Social Security and the Federal Government Deficit

December 20, 2012 2 comments

Richard Durbin is a senator from Illinois who recently commented on the connection between Social Security and the federal government‘s deficit. Here is a news quote that is easily found: “Social Security does not add one penny to our debt — not a penny.” To say that this is a distortion of the truth is an understatement. For a correct statement about Social Security and the deficit, read this article. The situation can be described as follows.

When the Social Security system was receiving more money than was paid out to Social Security recipients, the excess funds were to be invested into a trust fund consisting of marketable securities. Then, if a time arose where payments to recipients of Social Security exceeded funds received from Social Security taxes, the securities in the trust fund could be sold to generate the payments to Social Security recipients not covered by inflows of tax revenue.

But the government long ago spent the assets in the trust fund, replacing marketable securities in the trust fund with nonmarketable securities. These new securities are really just placeholders for marketable debt that was sold and these new securities cannot be sold to raise the cash needed to pay recipients of Social Security. In the event that Social Security payments are greater than Social Security receipts, the government must sell marketable debt, raising the cash needed to make payments, replacing the nonmarketable debt with the marketable debt newly issued. So when there is a net outflow of funds from the Social Security system, the government must borrow to make the payments that it is legally required to make.

Senator Durbin is superficially correct – there is no net change in the stock of debt since a newly-issued security replaces a nonmarketable older security, leaving the stock of debt unaffected (and, incidentally, this is why Social Security payments have nothing to do with the debt ceiling). But if the government is unable to borrow, say it finds itself in the same position as Greece, then the government will not be able to make all legally-required Social Security payments, unless it prevails upon the Federal Reserve to effectively buy the bonds needed to make the payments. This amounts to using money to finance the government deficit. If there is a debt crisis, defined to be a situation where the government is unable to borrow, then Social Security recipients would not receive their payments absent any action by the Federal Reserve.

To claim that there is no problem with the Social Security system is absurd. As baby boomers retire in greater numbers, the amount of government borrowing will rise correspondingly. Thus there is the risk that, in the future, lenders will be unwilling to lend the increasingly large amounts needed to cover Social Security payments.

Economics One

A blog by John B. Taylor

The Grumpy Economist

One economist's views on economic policy.

The Blog

The latest news on and the WordPress community.

%d bloggers like this: