Social Security Funding Problem Solved

Without anybody realizing it, the Obama Administration may have solved the long-term Social Security problem.  How? By tapping general revenues to fill in the shortfall in the trust fund.

Oh, you didn’t realize that the historic wall between the Social Security Trust Fund and general revenues had been breached? Neither did I, but I quote from Allan Sloan and Ezra Klein. First Mr. Sloan here:

Next year, as you probably know, workers subject to Social Security taxes will pay only 4.2 percent of their “covered wages” -wages up to $106,800 – rather than the normal 6.2 percent. This will reduce Social Security’s cash proceeds by $112 billion, according to Congress’ Joint Committee on Taxation.

What impact will this cash shortfall have on the Social Security trust fund? None. Zero. Zip.

How can a $112 billion cut in Social Security revenues not affect the trust fund? Because Treasury will give the trust fund the same amount of bonds it would have gotten had the two-percentage-point tax holiday didn’t exist.

In other words, Treasury isn’t selling bonds to Social Security, it is creating them out of thin air and putting them into the trust fund. The missing cash? Uncle Sam will just borrow $112 billion from somewhere.

And now Mr. Klein here:

The tax deal cuts employee-side payroll taxes by two percentage points in 2011. This won’t harm Social Security, or at least it shouldn’t harm Social Security, because the money will just be replaced by general fund revenues (confused yet?). All in all, that should mean Social Security emerges unscathed.

But some liberals are understandably concerned that the payroll cut will be extended indefinitely. Then Social Security loses part of its long-term funding. And then what? More benefit cuts? Privatization?

I say, bring it on. Cutting payroll taxes and replacing them with general fund revenues is appealing in two ways. First, payroll taxes are much more regressive than income taxes. Second, I’m actually fine with breaking the sanctity of Social Security’s closed funding loop. A lot of liberals disagree with me on this point, but hear me out.

This was a *BIG* deal.  The Obama Administration just gave the Trust Fund $112 billion out of general revenues. Why not do that again when the Trust Fund runs dry? No reason at all.

In fact, breaching the wall between the trust fund and general revenues changes the whole debate over Social Security. The current level of benefits can be funded, if we are willing to raise taxes or cut other items. Or, as many conservatives want, we can fund the creation of private retirement accounts. Whee!

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About Michael Mandel 126 Articles

Michael Mandel was BusinessWeek's chief economist from 1989-2009, where he helped direct the magazine's coverage of the domestic and global economies.

Since joining BusinessWeek in 1989, he has received multiple awards for his work, including being honored as one of the 100 top U.S. business journalists of the 20th century for his coverage of the New Economy. In 2006 Mandel was named "Best Economic Journalist" by the World Leadership Forum.

Mandel is the author of several books, including Rational Exuberance, The Coming Internet Depression, and The High Risk Society.

Mandel holds a Ph.D. in economics from Harvard University.

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