Sunday, February 06, 2011

Social Security deepens nation's deficit

Published in The Tennessean, Sunday, February 6, 2011

Social Security deepens nation's deficit

by Richard J. Grant

In December 2010 without a Congressional tax compromise, tax rates would have risen significantly for incomes, dividends, and especially capital gains. Those who wanted these tax rates to rise cited the need for more tax revenue and saw foregone taxes as a “cost to government.” They rejected the warnings of “supply-side” economists who suggested that increased marginal tax rates would discourage economic activity and yield little, if any, new tax revenue. But part of their compromise was to reduce the employee portion of FICA tax payments by two percentage points for one year.

The tax compromise also included an extension of unemployment benefits and increased spending on an array of special-interest projects. At a time of record-high budget deficits, support for the FICA rate reduction must have been based on political considerations, not genuine economic concerns.

The FICA payroll-tax payments are dedicated to Social Security. Until last year, the Social Security system produced surpluses that were used to offset deficits in the federal government's operating budget. Although Social Security is often spoken of as a free-standing pension plan, its surpluses have always been lent to the Treasury to be used as if part of a unified budget.

Of all the federal government’s transfer programs, Social Security is the one least likely to carry any stigma for the recipients. The dedicated tax has the appearance of a pension-plan contribution. Eligibility for benefits depends on one’s age, not on anything that might suggest some type of failure, as might be the case with unemployment. After decades of making “contributions,” new retirees feel locked-in to the system and perfectly entitled to the promised benefits.

Increasing retirements would have put the Social Security system into a structural long-term deficit by the middle of this decade. But the recent recession put the system into deficit last year, and the reduction in FICA payments will almost certainly ensure another deficit. Once a net contributor to the operating budget, the Social Security system has begun to draw down the IOUs it holds against the Treasury, thereby imposing a net burden on the general fund.

The political motive to reduce the FICA tax was to appear to be cutting the tax burden on the “little guy.” But it also suggests abandonment of a program model that would run chronic deficits and appear to be in a constant state of failure. At a time when advisers insist that the only way to save the model is either to increase the dedicated taxes or reduce benefits, it might be astute to accept that the program is part of the general fund. It was never a pension program based on saving and investment; it is a current-income transfer program based on current taxation.

Social Security spending comprises more than a quarter of the federal budget. It is larger than the entire defense budget. Sen. Bob Corker and Sen. Claire McCaskill were correct to include Social Security as well as other entitlement programs in their proposed bill to place a cap on federal spending. This bill would not necessarily cut Social Security, but it would force a prioritization of spending.

We should remember all of this when we hear Senate majority leader Harry Reid demagogue the bill by insisting that “Social Security has not contributed one penny to the deficit.” It has. All government spending programs contribute to the deficit.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011