Make Social Security Pay Its Own Way

January 3, 2012

Congress and President Obama recently extended the 2011 payroll tax holiday into the first two months of 2012.  It is not yet clear how the holiday has affected consumer demand and the overall economy, but it is clear that the holiday's diversion of general revenue from the Social Security trust fund has undermined the original intent in creating the program.  As it was originally envisioned, the Social Security trust fund was to remain apart from the general revenues of the government.  However, the federal government has in the past few decades found several occasions that warranted a break with this framework, says Alan D. Viard, a resident scholar at the American Enterprise Institute.

  • The $1.2 trillion of surplus payroll taxes collected between 1984 and 2009 were immediately lent to the general revenue pool of funds and appropriated to other programs.
  • The 2009 stimulus package provided an extra $250 benefit payment to Social Security recipients and billed the cost to the general treasury.
  • The jobs bills adopted in March 2010 and November 2011 trimmed Social Security taxes for some employers and tapped the general treasury to make up the loss.

On each occasion, the administration has found reason for funds to be pulled away from Social Security toward other ends, but this may prove dangerous for a number of reasons.  The borrowing that has taken place from Social Security has created a substantial government liability to the fund (the original $1.2 trillion mentioned above, along with $5.1 trillion in compounded interest payments).  Many point to the enormous general deficits and argue, justifiably, that the federal government may not be able to honor its commitment to Social Security.

Even if the government is able to repay what it has borrowed, however, this does not address the true danger.  As the government continues to shift money between the two funds, the delineation between Social Security and other programs will become muddled and distort funding priorities.  This was not the intention of the creators of Social Security when they made provision for a distinct trust fund and a separate revenue form in the payroll tax.

Should the government wish to continue to ignore the intended autonomy of the Social Security trust fund, it should take this policy stance to its natural end: Social Security revenues and liabilities should be pooled into the general budget.

Source: Alan D. Viard, "Let's Make Social Security Pay Its Own Way," American Enterprise Institute, December 28, 2011.

For text:

http://www.aei.org/article/economics/retirement/social-security/lets-make-social-security-pay-its-own-way/

 

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