Will Government Repay Its Debt to Social Security?

Some people just assume that, since the Social Security surplus was “borrowed” or “stolen,” during the period when it was not needed to pay Social Security benefits, the government will automatically repay the looted money when it is needed. It is not at all certain that this will happen.

In 1983, in response to the recommendations of the 1982 Presidential Commission on Social Security, Congress enacted a hefty hike in payroll taxes. The tax hike was designed to gradually prepay, over a period of more than 25 years, much of the cost of Social Security benefits for the baby-boomer generation.

The Commission believed that if we continued with the strictly “pay-as-you-go” system, where each generation pays for the benefits of the previous generation, the taxpayer burden on the generation that had to pay for the Social Security benefits of the baby boomers would become overwhelming. That is why they urged that a large reserve fund be built up in advance of the retirement of the baby boomers.

By increasing taxes in 1983, to generate annual Social Security surpluses for the next quarter-century, the tax burden would be manageable, if the surplus revenue was saved and invested as it was supposed to be. When the cost of Social Security benefits began to exceed payroll tax revenue, in about 2016, the Social Security trustees could dip into the reserve to make up the difference between benefit costs and payroll tax revenue. It was a good plan, and the payroll tax hike has generated approximately $2.5 trillion in surplus revenue that would have been enough to pay full benefits until at least 2037. Unfortunately, none of the surplus revenue was saved and invested. Dishonest politicians from both political parties used the surplus as a giant slush fund and spent every dollar of it on other government programs.

Some people just assume that, since the Social Security surplus was “borrowed” or “stolen,” during the period when it was not needed to pay Social Security benefits, the government will automatically repay the looted money when it is needed. It is not at all certain that this will happen. Where will the government get the money with which to repay the Social Security debt? Since the national debt has soared from $1 trillion in 1981 to more than $12 trillion today, and continues to rise at an alarming rate, the government will probably not be able to borrow money from the public to repay Social Security. This means that the only way the government can repay the Social Security money is by raising taxes.

Taxes have never been popular in this country, but they are probably more hated today than ever before. The large tax cuts under both President Ronald Reagan and President George W. Bush , and the rhetoric used to justify those cuts, have convinced many Americans that tax increases are just about the greatest of all evils and that tax cuts are almost always virtuous. Therefore, it is hard for me to believe that either the Congress or the American people would support a large tax increase for the explicit purpose of replacing tax revenue that has been misspent by the government. The government cannot just increase taxes when there is a need for more revenue. There is a very difficult political process that any tax increase must go through in order to be enacted into law, and I don’t think the public is in the mood today to support a large tax increase. If the government cannot borrow the money, or raise it through higher taxes, it will be unable to repay the looted Social Security money. If that happens, Social Security benefits will have to be cut.

The notion that the government might arbitrarily choose to cut Social Security benefits at some point in the future is unacceptable to most Americans who believe that, once they have paid into Social Security, they are guaranteed retirement benefits. Some say “BY LAW, the government has to pay me full benefits because of the FICA taxes that I have paid.” But they are wrong.

One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so. In a 1960 ruling by the United States Supreme Court, the court ruled that nobody has a “contractual earned right” to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security. Some did not take the language seriously because they thought it was probably unconstitutional. However, in 1960, in the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.”

As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.

About the Author

Allen W. Smith was a professor of economics at Eastern Illinois University for 30 years.