Good summary of the issues facing Social Security

I used to use The Economics of Macro Issues and The Economics of Public Issues by Roger Miller, Daniel Benjamin & Douglass North as supplemental textbooks. Each one had a chapter about Social Security.

The WSJ had a good article on this last week. See Social Security Funds Are Running Dry. Don’t Panic. Congress faces tough decisions about the program’s finances, but there may be an easier political path by Andrew Duehren (although the title in the print edition was "Social Security Is Running Dry, Posing a Political Test"). Excerpts:

"An aging population is pushing up the cost of the program as a smaller share of Americans directly pay into it. That imbalance means that Social Security could become unable to provide full retirement and disability benefits to Americans in 2035, the program’s trustees warned on Monday. 

At that point, without congressional action, elderly and disabled Americans who rely on Social Security could see their payments cut by 17%. Congress could avoid the crisis by raising payroll taxes, trimming benefits or some combination of the two."

"But they may not have to. The U.S. government will still likely be able to afford to pay full benefits to retired and disabled Americans in 2035. Whether it does so will in some ways be an accounting decision for lawmakers who control how money is classified within the government—and whether they want to tackle tough questions about federal spending or sidestep the politically radioactive debate."

"For decades after Congress overhauled the program in 1983, Social Security took in more money than it spent on benefits. The excess accumulated in the trust funds.

But money sent to the trust funds didn’t sit there. Instead, Social Security technically lent it back to the rest of the U.S. government, which then used it for anything from funding military operations to paying back bondholders. 

In return for the cash, the government gave the trust fund special IOUs—Treasury bonds that can’t be traded but are secured by the full faith and credit of the U.S. Those bonds generate interest, supplementing the income Social Security now nets from a 12.4% payroll tax, usually split between employers and employees, on up to $168,600 of income. 

To many economists, one part of the U.S. government lending to another part of the U.S. government is anomalous. Many of them disregard intragovernmental debt like the Social Security trust funds when they consider the overall U.S. debt burden. Overall U.S. debt is roughly $34.6 trillion, while debt held by the public, the metric favored by economists, is $27.5 trillion. 

In the past few years, as the cost of Social Security has outpaced its income, the program has had to rely on the trust fund to pay its bills. To do that, Social Security redeems some of its bonds to get cash from the Treasury. In 2023, the balance of the Social Security trust funds declined by roughly $41 billion.

The Treasury pays the bill for Social Security the same way it pays all sorts of other bills: by using non-payroll tax revenue and money borrowed from investors on Wall Street. While that effectively means that Social Security benefits are now financed by overall revenue, experts in the program emphasize that the legal obligation created by the bonds is important.

“That’s possible only to the extent that Social Security was running on a surplus sometime in the past, which was reducing pressure on general revenues,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities. “That’s an important political and legal distinction even if it’s not so important from an economic point of view.”

The perception that Social Security is safe from political meddling also helps Americans feel confident in the program. Ahead of the depletion of the trust fund, Congress would have to pass a law to allow Social Security to pull from general, non-payroll-tax revenues without a bond from the trust fund to redeem."

"The move could also mean the U.S. deficit continues to grow at a pace economists find alarming, potentially weighing on the performance of the economy."

"“I am committed to extending Social Security solvency by asking the highest-income Americans to pay their fair share without cutting benefits or privatizing Social Security,” the president said in a statement on Monday."

"Spending on Social Security represented 5% of U.S. gross domestic product this past year, and it is expected to reach 5.9% of GDP in 2034"

"“The system is adding to federal borrowing. Getting rid of the trust fund and simply calling it a day would be perceived as Congress giving up on doing anything about the fiscal trajectory,” said Wendy Edelberg, a senior fellow at the Brookings Institution and a former chief economist at CBO. “I don’t put it past them. These are more political questions than economic ones.”"